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spk00: Good morning. Thank you for standing by, and welcome to the Booz Allen Hamilton's earnings call covering first quarter results for fiscal year 2022. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I now like to turn the call over to Mr. Ruben Day.
spk08: Thank you. Good morning, and thank you for joining us for Booz Allen's first quarter fiscal year 2022 earnings announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on slide two. I'm Ruben Day, Head of Investor Relations, and with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer, and Lloyd Howell, Executive Vice President, Chief Financial Officer, and Treasurer. As shown on the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking, and therefore are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ 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 relief and set forth under the forward-looking statements disclaimer included in our first quarter fiscal year 2022 earnings relief. and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for our 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 2022 slides. It is now my pleasure to turn the call over to our CEO, Horacio Rosenti. We are now on slide four.
spk05: Thank you, Ruben, and good morning, everyone. Thanks for joining the call. As always, Lloyd and I are pleased to share our latest financial results and to represent the great work of the more than 28,000 people of Booz Allen. In addition to discussing our first quarter performance, this morning I will take a little time to talk about the future of work. Our industry, in fact the entire economy, is transitioning to more in-person work as we recover from the COVID-19 pandemic. And at Booz Allen, we're excited about the opportunities this presents to our people and clients. After my remarks, I'll give Lloyd the floor to cover the financials in more depth. Let me start with an overview of the quarter. On our last call in late May, we talked about our near and mid-term priorities and our fiscal year 2022 outlook. We said we expect another year of significant revenue growth with strong earnings growth, continued cash generation, and strategic deployment of capital. At the same time, we noted that the pattern for the year would likely look different from recent years, with slower revenue growth in the first half and significant acceleration in the second half. This pattern is due to several factors, including the recovery from the pandemic, the implementation of a new financial system, and our acquisition of Liberty IT solutions. The results we released this morning are very much in keeping with the expectations we laid out. As such, we are pleased to reaffirm our guidance for the full fiscal year. Operationally, we continue to move back to pre-pandemic business rhythms. In our defense and civil businesses, we are aligned to our government's top priorities, have a robust pipeline, and several great wins in the quarter. These two parts of our portfolio represent three quarters of our revenue, and they continue to deliver solid growth. In our intelligence business, hiring is going well, and the portfolio reshaping we have done has yielded some important wins. The first quarter decline in revenue was largely due to low billable expenses, and we continue to expect a growth year in this business. Global commercial represents 2% of our revenue. Continued declines are tied to our portfolio reshaping and the impact of the pandemic. We do expect to see year-over-year growth in the second half of the fiscal year. Taken together, our entire portfolio of business produced low single-digit revenue growth year-over-year as we expected. The relatively slow growth was driven primarily by a return to more normal staff utilization and PTO trends compared to the first quarter of last fiscal year, when the country was largely in lockdown. At the bottom line, adjusted EBITDA, adjusted EBITDA margin, and adjusted diluted earnings per share were ahead of our expectations. Book-to-bill for the quarter was also strong, and we're excited about the quality, mission-centered work we are winning. Cash flow operations came in light, primarily driven by one-time costs related to the Liberty transactions. Lloyd will discuss all the numbers in detail in a few minutes. As you may remember, on our last call, we spoke about a set of near and midterm priorities that are critical to our success. The main reason for our optimism about the year is the great progress we have made to date. Let me go through them briefly. Our top priority is recruiting. and in the first quarter, we began to see results from our laser focus in this area. We are seeing sequential month-over-month growth and believe momentum will build over the remainder of the year. Second, the reshaping of our intelligence and global commercial portfolios continues. We believe the tactical and strategic moves we are making will yield year-over-year growth. Third, we are very pleased to have completed the Liberty acquisition in mid-June. Our teams are working side by side, and everything we have seen since the closing confirms that this was a great deal for Booz Allen and for Liberty. We are very excited about the strategic opportunities we have to augment each other's strengths. Fourth, the NextGen financial system successfully launched on April 1st and is running very well, to the great credit of the team. After more than three years of preparation, launching the system and executing the first quarter close without any major disruptions were critical milestones. On behalf of the whole firm, I want to extend a big congratulations and thank you to the NextGen team for all their hard work. And fifth, we continue to invest in our people and capabilities as we carefully manage the transition to a post-COVID environment. Consistent with that, creating the best possible experience for our talent is a constant area of focus for us. In that vein, I'd like to take a few minutes today to share with you how Booz Allen is thinking about the future of work. We are cautiously optimistic that the worst of the pandemic is behind us in the United States and most places that Booz Allen operates. As such, we are preparing to fully reopen our offices the day after Labor Day, provided that health and safety allow it. As we move towards that reopening, we intend to take the best of what we've learned over the past 16 months and create ways of working that better serve our talent, our clients, and the critical missions we are a part of. Going forward, our workforce will have three operating models. First, we have always had a small group of employees who are purely remote. And we expect that to continue and for that group to remain relatively small. Second, we have a group of people who work full time at government and our facilities. And that too will continue, although we expect it to proportionately decline from historical levels. Our clients have shown a great deal of creativity over the course of the pandemic. And based on this experience, many are interested in flexible models that better serve their missions while reducing the number of people who are 100% onsite. The third workforce model is a hybrid. And we expect, over time, for this to be a majority of our people. Employees in this group will spend less time in Booz Allen and client offices than previously, and instead have a mix of telework and in-person collaboration. This gives people much more flexibility in their personal and family lives. while at the same time preserving our culture and the close connection to clients, our firm, and each other. What is most exciting about the future of work conversations we've been having internally and externally is the opportunity everyone sees for greater flexibility. In fact, there is an expectation that we need to work in new ways because the technology allows it and the competition for talent simply requires it. To succeed, today and in the future, employers, whether they are in the government or the private sector, must foster a workforce that is more distributed, more digital, and certainly more diverse. Booz Allen is a leader in this area, working with our government clients to help them rethink and reshape the way they accomplish critical missions. Many clients believe that the reality of today's world and the needs of the next decade demand fundamental change in how federal agencies execute their business on behalf of all of us. And consistent with who we are, we will lean into those change opportunities proactively. And so, as we look towards the fall and beyond, our firm has a lot to be optimistic and excited about. We are working very hard to take care of our people, build our business, serve clients, and position Booz Allen for the future. As always, our overriding goal is to continue to create near and long-term value for our investors and all our stakeholders.
spk01: And with that, Lloyd, over to you. Thanks, Horacio, and good morning, everyone. Before I jump into the financials, I want to note that this has been a truly busy quarter for us. A few of the major highlights included closing our acquisition of Liberty and launching the integration process. replenishing our balance sheet through the bond market, investing in Latent AI, a highly strategic, rapidly growing company in the AIML space, doubling down on our recruiting and hiring efforts with promising results, implementing our next-gen financial system, and, of course, engaging across the firm on our strategic review and our next investment thesis. We are energized by the pace of activity and look forward to sharing more in the months to come. Now on to first quarter performance. As we noted in May, we expected some early year choppiness in our top line results as we move into a post-pandemic operating rhythm. However, we were able to maintain strong performance at the adjusted EBITDA and ADEPTS lines through disciplined cost management. Additionally, we are encouraged by our solid bookings performance, as well as our pace of recruiting. Operating cash flow was light of our initial forecast, but we view most of the moving pieces as either one-time or transitory. Altogether, today's results are in line with the expectations we laid out last quarter, and we remain confident in our plan for the full fiscal year. At the top line in the first quarter, revenue increased 1.7% year-over-year to $2 billion. Liberty contributed approximately $16 million to revenue growth. Revenue excluding billable expenses grew 1.9% to $1.4 billion. Revenue growth was driven by solid operational performance, primarily offset by higher-than-normal staff utilization in the comparable prior year period. Top line performance for the quarter was in line with our expectations. As a reminder, we forecast constrained low single digit top line growth in the first half of the year, driven by four dynamics. First, the need to ramp up on contracts and hiring. Second, a more normalized utilization rate in the first half of this fiscal year compared to the high staff utilization in the first half of fiscal year 2021. which we believe to be worth roughly 300 basis points of growth. Third, high PTO balances coming into the fiscal year with an expectation that our employees will take more time off. And fourth, minor timing differences in our costing of labor resulting from implementation of our new financial system. As we noted before, we expect growth to accelerate throughout the year. Now, let me step through performance at the market level. In defense, revenue grew 4.4 percent with strong growth in revenue expenses partially offset by significant materials purchases in the prior year period. In civil, revenue grew 6 percent led by strong performance in our health business and the addition of liberty. We expect momentum to build throughout the year. As more administration priorities ramp up and we continue to capture opportunities, building on our strong win rates. Revenue from our intelligence business declined 6.4% this quarter. Revenue ex-billable expenses grew in line with our expectations, but were more than offset at the top line by lower billable expenses. We are excited by a number of critical recent wins in the portfolio. and we believe we have the right leadership and strategic direction in place to execute a growth year. Lastly, revenue in global commercial declined 27.4% compared to the prior year quarter. We anticipate year-over-year growth in the second half, an outcome that is largely dependent on hiring additional talent to capitalize on growing demand, as well as moving past challenging prior year comparables in international. Please turn to slide five. Our book to bill for the quarter was 1.3 times, while our last 12 months book to bill was 1.2 times. Total backlog grew 16.5% year over year, including Liberty, resulting in backlog of $26.8 billion, a new record. Funded backlog grew 1.6% to $3.5 billion. Unfunded backlog grew 91%, to $9 billion, and price options declined 3.7 percent to $14.3 billion. We are proud of our bookings performance in the first quarter, coming off a seasonally strong fourth quarter result. We believe that the stability of our longer-term book to build demonstrates continued strong demand for our services, as well as the high value placed on our understanding of client missions. Pivoting to headcount, As of June 30th, we had 28,558 employees, up by 1,177 year-over-year, or 4.3 percent. Accelerating headcount growth to meet robust demand for our services is our top priority for the year. We are encouraged by how we closed the first quarter, and we expect to see progress throughout the year. Moving to the bottom line, Adjusted EBITDA for the quarter was $238 million, up 11.8% from the prior year period. This increase was driven primarily by our ability to, again, bill for fee within our intelligence business, as well as the timing of unallowable expenses within the fiscal year. Those items, along with continued low billable expenses as a percentage of revenue, pushed our adjusted EBITDA margin to 12%. We expect billable expenses and unallowable spend to pick up as we move throughout the year. First quarter net income decreased 29% year-over-year to $92 million, primarily impacted by Liberty transaction-related expenses of approximately $67 million. Adjusted net income was $146 million, up 12.3% from the prior year period. primarily driven by the same factors driving higher adjusted EBITDA. Diluted earnings per share declined 27% to 67 cents from 92 cents the prior year period, and adjusted diluted earnings per share increased 15% to $1.07 from 93 cents. These increases to our non-GAAP metrics which exclude the impact of the transaction-related costs noted, were primarily driven by operating performance and a lower share count in this quarter due to our share repurchase program. Turning to cash, cash flow from operations was negative $11 million in the first quarter. This decline was driven primarily by lower collections, largely attributable to timing around receivables associated with the integration of our new enterprise financial systems. As our employees and clients adapt to the new invoicing system, we expect to return to a more typical collections cadence over the coming months. Operating cash flow was negatively impacted by approximately $67 million of transaction costs paid in the first quarter, which includes approximately $56 million of cash payments at closing of the Liberty acquisitions. These cash payments represent a reallocation of a portion of the overall $725 million purchase price prior to adjustments, from investing cash flows into operating cash flows. Capital expenditures for the quarter were $9 million, down $11 million from the prior year period, driven primarily by lower facility expenses. We still expect capital expenditures to land within our forecast range for the year. During the quarter, we issued $500 million of 4% senior notes due 2029. Additionally, we extended the maturity of our term loan A and revolving credit facility to 2026 and increased the size of our revolver by $500 million to $1 billion of total capacity. Those moves are in support of our disciplined capital deployment strategy. We will continue to use our balance sheet as a strategic asset. Please turn to slide six. During the quarter, we paid out $52 million for our quarterly dividend and repurchased $111 million worth of shares at an average price of $83.91 per share. In total, including the close of the Liberty acquisition, we deployed $889 million. Today, we are announcing that our board has approved a regular dividend of 37 cents per share, payable on August 31st to stockholders of record on August 16th. As our actions this quarter demonstrate, we remain committed to preserving and maximizing shareholder value through a disciplined, balanced capital allocation posture. Turning to guidance, please move to slide seven. Today, we are reaffirming our fiscal year 2022 guidance. As we discussed last quarter, the first half, second half dynamics we laid out are still the guiding framework for our full year growth expectations. We expect total revenue growth to be between 7 and 10 percent, inclusive of liberty. Our contract and hiring ramp will determine where we land within that range. We continue to expect revenue growth to accelerate throughout the year. We expect adjusted EBITDA margin in the mid-10% range. We expect adjusted diluted earnings per share to be between $4.10 and $4.30, based on an effective tax rate of 22% to 24%, and 134 to 137 million weighted average shares outstanding. ADEP's guidance is inclusive of both liberty and incremental interest expense from our $500 million bond offering. We expect operating cash flow to grow to $800 to $850 million, inclusive of the aforementioned $56 million of cash payments related to the liberty transactions. Due to these one-time payments, we expect to end the year at the lower end of our range, with partial offsets through a combination of working capital management and operational performance. And finally, we expect CapEx in the $80 to $100 million range. In summary, we are starting off the year just as we expected and look forward to a great year. Before I conclude, I would like to thank and congratulate our NextGen and corporate development teams on their tremendous diligence and dedication over the last few months. We were ambitious in trying to execute both a major acquisition and a company-wide rollover of our financial systems in the same quarter. While it is still early in both processes, we are thankful to our teams for putting us on a path to success. With that, Ruben, let's open the lines to questions.
spk08: Thanks, Lloyd. Operator, please open the lines.
spk00: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Sheila Kyoglu with Jefferies. Your line is open. Sheila Coyolu, your line is open. Please check your mute button. Our next question comes from Carter Copeland with Mellius Research. Your line is open.
spk07: Hey, good morning, gentlemen.
spk01: Good morning. Hey, Carter.
spk07: Horacio, I noted you spent a lot of time, a lot of emphasis talking about you know, the objective on hiring and getting headcount up through the course of the year. I mean, I realize that it's always a dynamic situation out there in the job market, but are you encountering any sort of new challenges here? I realize it's a different working environment, but as you try to hit those targets for headcount additions, what sort of challenges are you running into in this market?
spk05: Carlos Ortiz- Carter, I think if you look at the numbers, things are looking very good. We have sequential month-over-month increases in hiring, and the team is very focused on this. As we've talked about before, this is a highly competitive market, and so the key for us is to continuously renew our employee value proposition and make sure that people know why Booz Allen is the right place to come to work. You might have seen it in the last couple of weeks. We were rated by Forbes as the number two company for diverse talent. Just this week, we were rated also by Forbes as the top company in the country for women. And this is based on surveys of employees. And that just speaks to the fact that the people at Booz Allen
spk01: uh feel strongly about what we're doing how we're doing it and are telling everybody and so while we need to keep our foot on the gas i i am confident that we can ramp up recruiting to the right levels and we will stay on it you know carter i would just add that um i think it was the last quarter we said that uh this was going to you know create some choppiness but the reality is uh we're seeing good momentum uh 4.3 percent growth year over year and three percent quarter to quarter. We just have to stay at it, and I think the things that we've got underway are beginning to work.
spk07: Okay. And, Lloyd, just a quick one on the cash flow and obviously the receivables dynamic in the quarter. How long in terms of that transition and client billing and whatnot do you think that will take to kind of correct itself, if you will?
spk01: Yeah, I mean, we're confident that the solid processes that we put in place are really going to kick in. And as was pointed out in the prepared remarks, it was late, really due to a one-time transaction-related expenses to Liberty. And we see that this year it's going to turn around. We're expecting things to begin to improve next quarter and beyond. Awesome. Thank you, gentlemen. Thank you.
spk00: Our next question comes from Makers with Wells Fargo. Your line is open.
spk02: Hi, good morning, guys. Thanks for the question. Harasi, you talked about kind of the three operating models and people sort of shifting to this more of a hybrid work model. I guess can you talk about what the financial impact of that is? Is there an opportunity for more profitability or does any sort of cost savings there ultimately kind of flow back to your customer?
spk05: You know, I would put this in the too early to tell category. There's a lot to learn down this path and to understand. I do believe, having said that, that the increased flexibility will do a couple of things for us. First of all, it allows us to serve clients more effectively and more efficiently, hopefully from around the country. You know, there's some concentration of our business in the Washington metro area. That's a very contested talent market, and while we're doing well here, boy, our clients and we would benefit from being able to bring talent from more across the country. We're doing that from our team in Charleston, serving clients here. The Liberty team has a significant delivery center in Florida, and that's also working really well. So I think this flexibility is great for that. And I think it's also great for people and to both attract and retain people, which is ultimately the driver of our growth and the driver of everything else. So over time and in the long run, I think this will make us more effective, more efficient, and more profitable. But the near-term goal is to make us more flexible.
spk01: And I would just add from a financial perspective, cost savings was not the driver here. It really was what's best for our people as well as our clients and as you can see with the low capex spend you know we feel that's a reflection of the fact that you know we're emerging from coven facility spend has been light it'll pick up a little bit but at the end of the year we still expect to be within our 80 to 100 million in capex got it thanks thanks and i guess if i could do one more um you know one of your uh peers the other day kind of mentioned they were seeing
spk02: Some contract delays may be driven by some protests. Is that something you guys are seeing at all? Or maybe you could just comment about sort of the contracting environment here as we come out of COVID.
spk05: Right now, things are very robust. As you saw in our book to bill, we're back to a very robust book to bill. Backlog is record levels. And the pipeline looks very good. We're engaging with clients and partners. They're very interested in both what we have to say and how we can help them, especially in these leading edge areas where new technology meets mission to drive change.
spk02: Thank you.
spk00: Thank you. Our next question comes from with Morgan Stanley.
spk12: Your line is open. Good morning, gentlemen, and thanks for taking my question. Good morning. Good morning. I just wanted to touch on Liberty IT here for a moment. Now that you guys have closed the deal and been able to get under the hood a bit, so to speak, are there any changes to the $200 million revenue synergy target or any other assumptions around the deal? And what, if anything, new have you learned now that you've been able to really get inside the business and take a look?
spk05: Let me start by talking a little bit about what it feels like on the ground, and then I think Lloyd can address any financials. I will tell you, we're really, really happy. After close, we've really had an opportunity to get to know them better, to start to work things together. We have a very detailed integration plan that we are following, and it's working well. We are very comfortable, in fact, bullish about what we're going to do together in the market. They have a big growth curve, and they're on it. And we're beginning to see, frankly, a number of opportunities outside of where their core client relationships were, like in defense, where what they do, especially around low code, no code, is in high demand, and we can bring it as an integrated team. So all I would say is, again, early days, too soon to tell, but we really like what we're seeing. and I personally have really enjoyed getting to know this team and watching what they can do.
spk01: You know, on a financial dimension, I've got to echo Horacio's comments. We're also very comfortable and pleased with how it's playing out. There's no change to what we expected at the beginning in terms of the $200 million, and we're working very well together, and the integration is going well.
spk12: Fantastic. And then just a quick one on your AI and ML business. You know, at this point, you've got two of the largest DOD contracts out there and EMAPS and Jake. You've also made some investments in this space, e.g. the latent AI deal earlier this quarter. Can you guys size that business, the AI ML overall business at Booz? And How should we think about growth expectations for this market going forward?
spk05: I guess I'll start again. I'll say the following. We don't view AI as its own thing, and neither do our clients. We view AI as a critical technology to drive mission. And so even in these contracts that have an AI-centric scope, the work is not just building algorithms. It's taking things from the lab to the field, which requires a large number of things. We are seeing AI penetrate areas from not just the ones we're talking about, but cyber, certain intelligence topics. We're going to see it in space. We believe this is a major wave, and we are, by all accounts, a leader in driving this. You saw us do the latent AI Investment because we're excited about this technology they have around compression algorithms and the ability to bring AI to the edge more efficiently. And we intend to not just protect but really expand our leadership position.
spk12: Fantastic. Thanks for the update, gentlemen. Thank you.
spk00: Our next question comes from Kazan Rumor with Cowan. Your line is open.
spk06: Yes, thanks so much. Good results. So $67 million basically acquisition cost. That seems extraordinarily high. Could you give us some color? Why was it so high? Was it in G&A? Because if it was in G&A and I take it out, it looks like the G&A percent of revenues was down $200 million. Could you share some light on all those issues?
spk01: Sure. You know, of the $67 million, about 56 of it was due to a transaction bonus plus advisory fees and retention costs. So it's not, as we said in our prepared remarks, it's really the original purchase price of $725, and then of that amount, it came out in terms of bonuses and retention.
spk06: But, I mean, if you back all that out of your GNA, it looks like the GNA is really the ongoing GNA rate, you know, around 11.6, 11.7 versus 12.6 last year, so that the GNA is actually fundamentally much lower or, you know, look
spk01: Yeah, I'd say at the beginning, Kai, it's a bit too early. From our perspective, it'll be cyclical and will play out over the course of the year.
spk06: Okay, thank you.
spk01: Sure.
spk00: Our next question comes from Seth Seifman with J.P. Morgan. Your line is open.
spk04: Yeah, thanks very much, and good morning, everyone. Um, quick question. I apologize if you mentioned this, but I think last quarter, you guys talked about a pause on a on a large cyber program. And I was wondering if you if you could update us on on that, if that's, you know, back to expected levels, and you have the, you know, future revenue and earnings expectations for that program.
spk01: Yeah, we're still optimistic that that program will receive the funding and sort of reinitiate. If you're following sort of the comings and goings of budget discussions, clearly cybersecurity is a priority of this administration, and they have devoted a portion of the budget to that. It takes a bit of time for that money to sort of trickle down into the various agencies and departments, but in close conversations with our clients, they remain optimistic that they indeed will receive the necessary funding, the least of which is in today's environment. It's definitely needed. So we're positioned well. We've been in touch with our clients throughout the transition, and we're expecting at some point this year for things to resume.
spk04: Okay, great. Thanks. And then just as a follow-up, I guess, And if I look back in time, maybe before fiscal 20, you know, you guys kept a lower level of cash on the balance sheet. Then it got pretty high. And, you know, then we had the Liberty acquisition. I guess how are you thinking from here that how much cash you want to kind of keep in reserve in order to, you know, have options for M&A versus share repurchases as we go through the rest of this year?
spk01: Sure. I mean, pre-pandemic, you know, 20 and even earlier, I've always said we need about $150 million for working capital needs. And, you know, as you point out, we've been well north of that for some time. We see that as a strength. As Horacio and I have been You know, sharing, we expect to leverage our balance sheet, not the least of which, when it comes to capital deployment, will be inorganic opportunities. And Liberty is the most recent example of that. But we're also got a pretty disciplined patient capital deployment approach. So whether it's repurchases or regular recurring dividend, we'll make the calls as the environment deems. We've got a healthy, as you point out, balance today, about $1.6 billion in cash, and we're always looking to deploy that to the benefit of our shareholders in the near, mid, and long term.
spk05: I'll just footstomp one point that Lloyd made, which is that we increasingly view M&A as a strategic accelerator for our business. If you look at Liberty, if you look at TracePoint, if you look at Latent AI, they're allowing us to leapfrog our own development efforts, sometimes by years. And we're excited to do that, and to the extent that we can continue to find opportunities like that, we intend to take advantage of them.
spk04: Great. Thanks very much.
spk00: Our next question comes from Gavin Zins with Goldman Sachs. Your line is open.
spk09: Hey, good morning. Good morning. In response to Seth, you mentioned cyber budgets or funding. Obviously, those are growing, but it seems like there have been some pretty big numbers proposed, whether it's part of COVID relief or the latest TMF request, but it feels like those numbers have come in a lot lower. Why is that? Is there a will but not a way to fund?
spk01: No, we're not seeing that. I mean, there's definitely a will, as Hirasi will share with you, he's talked to many of our elected officials, both sides of the aisle that see this as an area of importance. And I think if anything, just sort of the natural friction of making decisions, adjudicating the budget, and then the departments and services sort of receiving that is what we're seeing. We're not detecting in our conversations any hesitation or lack of momentum or desire, particularly when you're looking every day in the press at a SolarWinds or another more recent intrusion that's definitely top of mind. So, you know, we, as I said in the earlier response, you know, we're sticking close to our clients. We're talking to them and engaging on art of the possible. And once the money begins to flow, what's the best use of that? But, yeah. Again, you know, it's going to play out over our fiscal year, and we're on track to, you know, meet what we guided to.
spk09: Got it. And then quick clarification on the liberty – sorry, on headcount growth. Does that include the liberty acquisition?
spk01: It does.
spk09: So maybe excluding that looks like closer to something like 1.5 percent, you know, I think you said the target for the year was mid-single digits to get you into the 4% to 7% organic range. What do we need to see that pace accelerate at over the next couple quarters, assuming there's some lag dynamic of headcount utilization or headcount growth rate translating into revenue growth?
spk01: Yeah, I mean, we believe we're beginning to see it take place already. If you go back to Q4 – Horacio and I said coming out of our FY21 Q3 that this was going to be an operational priority for us. And we saw some improvement begin in our fourth quarter of last year. That has continued into this year. And initial, you know, indications are it's going to continue to build through the summer, and that will tee us up well for the second half. So it's happening, but, you know, it's a very competitive labor market, as I think we all know. and our business leaders are on it, and we're really beginning to see the results of that.
spk05: I'll just build on that by saying, you know, this is our top priority for the year. We've been honest and explicit about that, and what we need to see is sequential month-over-month growth. Recruiting is about momentum. It's about building pipelines and executing on pipelines of candidates, and that's what we're seeing inside the business, so we remain confident And that's why we are reaffirming our guidance and saying this morning we are on track.
spk09: Joseph DiNardi, your line is open.
spk00: Please check your mute button. Sorry about that. Good morning. Good morning, Joe.
spk03: Could you just talk a little bit about organic growth expectations for the year? Sorry if I missed that in guidance, but what you all are expecting. Thank you.
spk01: No worries. You know, for the year, we said 4% to 7%. And much like my previous comment, Joe, it really is going to hang on our ability to bring on the necessary talent. You know, we exited last fiscal year at a run rate of about 2%. We feel we're off to a good momentum building start to this fiscal year. But if we do what we expect to do, push it to the upper end of that organic range. But again, we're not taking our foot off the accelerator. Okay, that's helpful.
spk03: But I'm wondering if you just follow up on the maintaining the cash balance, where it is at elevated levels. What changed a couple of years ago to lead you all to think that that's the right strategy and then What is the advantage that it offers you all? Is it M&A that it allows you to transact more quickly, or is it on the buyback side? Like, what is the advantage it provides you? Thank you.
spk01: Sure. I'll take you back to when we, you know, it wasn't as robust as it is now. You all were peppering me with questions like, hey, you need to improve on receivables and collections, and that's exactly what we did. We got a lot more efficient with our collections, a lot more efficient with balancing that with payables. So it naturally led to an increase in our cash. And then quite frankly, with our capital deployment, we did not sort of focus on M&A activity at that time. And Hirashi and I began to say, hey, look, we're going to maintain our organic growth leadership position and look for ways to add inorganic opportunities to that. And so now with the more robust cash position, we are looking to do more deals. Liberty is the most recent. We've also talked about TracePoint, the investment we made there. And our pipeline of opportunities is continuing to grow. And that's what we really see. sort of what will be the use of the cash going forward.
spk03: Great. That's helpful. Thank you.
spk01: Sure.
spk00: Thank you. And our last question is from Toby Summer with Truist Securities. Your line is open.
spk11: Thank you. I was wondering if you have any learning now that the slowdown and kind of pause in hiring that occurred previously last year is getting ramped up again um because you know organic growth has been the hallmark of the company and uh that was a sort of a rare deceleration seemingly for you know something in the market or at your customers that that prompted you to slow it down have you learned anything that would might help you avoid that kind of circumstance in the future
spk05: Toby, I'll start. If I take you back, we were operating the business at very, very high utilization rates. And that was driven by the fact that people, you know, the country was shut down. People were not taking time off. And so the extra productivity, if you will, the extra available hours almost acted as new headcounts. And so it didn't make sense to keep pedal to the metal on that, and it didn't make sense to force our team to really drive down that path at the time where we were worried about people's emotional health, we were worried about running the business efficiently, delivering on contracts, and so forth. And frankly, we had a view that that change in productivity back to normal levels was going to happen this spring, not last fall. And that was the one thing we misread. And so with the benefit of hindsight and looking forward, maybe we would hedge our bets a little more on when would things turn in an uncertain environment and think about that a little more carefully. I go back and I say, you know, while we are learning from that and we certainly can always do better, I am very proud of the way the team performed over the last year. My confidence in this team is at an all-time high in terms of what they can do and what they will do. And, you know, hiring is now back up to really good levels, and we expect it to go even further, which is, sorry if I sound like a broken record, which is why I really do feel we're now on track and driving the business the way we want to.
spk01: The only thing I would add is, you know, there was a great deal of learning on the welfare of our people that we have. We spent a lot of time, whether it was through our 100 million resilience program, but as the year played out with all the different social matters that we were confronting, it really allowed us to have a different dialogue with our workforce that, frankly, we're seeing lower attrition than we might otherwise. So the investment in our workforce, I think, was another significant learning for us.
spk05: Let me come back one more time and just say we've talked a lot this morning about people and the importance of people to our business and the importance of taking care of people in our business. And so that's why we are thinking about how do we take the workforce forward. And that's why we are proposing this view that we need to build our workforce going forward in 3D, meaning more distributed, more digital, and indeed more diverse. And I think if we focus on that, All of the questions about how we build this great workforce for the future, how we blow past 30,000 people and beyond, that's going to be the foundation for that.
spk10: Thank you for the fulsome answer. My follow-up has to do with the commercial business. Could you refresh us on what the reorientation of that is and then what your expectations for sort of a growth in margin profile are once that is completed?
spk05: Where do I start? You know, we made the decision to de-emphasize some of our business in the Middle East over the last 12 months and emphasize our cyber business centered in North America but serving clients around the world. And I think that was a really good decision. I think we're seeing some of the financial implications of that work its way through the P&L and the, you know, this quarter maybe and next. But we expect strong growth in the second half, and we expect a good year. We're happy about TracePoint and what we're seeing in that investment there. And we're bullish about the opportunity of serving clients on cybersecurity, which, as you know, is a national priority. Thank you. Thank you.
spk00: Thank you.
spk05: I want to thank everyone for your time and for your questions this morning. We've opened the year with a solid performance, and as I hope you can tell, we're moving forward with a lot of energy and with confidence, both about the state of the market and our plans for the future. And in terms of plans for the future, we look forward to sharing with you a new investment thesis, and more about our strategic direction this fall. But in the meantime, enjoy the summer, be safe, and have a great day, everyone.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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