Booz Allen Hamilton Holding Corporation

Good morning. Thank you for standing by. And welcome to Booz Allen Hamilton's earnings call covering fourth quarter and full fiscal year 2022 results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I'd now like to turn the call over to Ms. Laura Adams. Please go ahead.

Thank you. Good morning, and thank you for joining us for Booz Allen's fourth quarter and full fiscal year 2022 earnings call. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on slide two. I'm Laura Adams, Senior Vice President and Treasurer and Interim Head of Investor Relations. And with me to talk about our business and financial results are Horatio Rozanski, our President and Chief Executive Officer, and Lloyd Howe, Executive Vice President and Chief Financial Officer. As shown on the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning are forward-looking, which may relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from forecasted results discussed in our filings with the SEC. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter fiscal year 2022 earnings relief and slides. It is now my pleasure to turn the call over to our CEO and President Horatio Radzanski. We are now on slide four.

Thank you, Laura, and good morning, everyone. Thank you for joining the call. Before we begin, I'd like to take a moment this morning to acknowledge the tragic events continuing to unfold in Ukraine. And share how Booz Allen is responding. As millions of people flee the country or are displaced, the need for humanitarian assistance and protection grows more acute every day. In response, we committed to provide aid through an employee-given campaign and company match. Our employees' engagement in the campaign has been tremendous, and I am grateful for their generosity and compassion. From a mission perspective, our teams in Europe and the U.S. are supporting our clients across a broad range of areas. They are working around the clock to deliver critical capabilities and insights to our clients. True to our purpose, they are working relentlessly to change the world. I'm thankful for their dedication, the extraordinary power of their work, and the difference they're making. To our teams supporting these missions, On behalf of the entire leadership team, thank you. Thank you for the work you're doing and the sacrifices you're making to serve our clients and the nation. It's an honor to call you our colleagues. Today and always, our thoughts remain with the Ukrainian people, and we hope for a peaceful and just resolution to the conflict soon. This morning, Lloyd and I are pleased to report our results for fiscal year 2022. In a year marked by exceptional volatility, Booz Allen committed to a new growth strategy and multi-year financials, invested in our future, and managed the business with precision and skill. I am extremely proud of the work and the impact our leaders and our entire team have made. Their talent and dedication underpin the results we share with you today. For the full fiscal year, bottom line results were excellent. Revenue growth was also solid, but below our expectations set a year ago. We remained steadfast to our operational priorities throughout the year, culminating in growth across all markets in both the fourth quarter and the full fiscal year. We adeptly controlled costs to deliver on both our bottom line commitments and invested in our future and our people. One year into our multi-year investment thesis, we have made strong strategic progress and are on track to deliver against our goals. Over the next few moments, I will set the strategic context for our financial performance, and then Lloyd will take you through FY22 results and FY23 guidance in depth. As we share with you on Investor Day, Booz Allen believes that the rapidly evolving challenges confronting our nation will accelerate the pace of change in our government's missions and use of technology. Five to ten years from now, technologies from 5G to AI and from blockchain to quantum will be ubiquitous across a range of missions. And because we have been preparing for this for over a decade, we believe Booz Allen holds a strategic first mover advantage. We have the opportunity to help our clients through their transformation to digital missions. And we are poised to convert this extraordinary opportunity into growth that creates long-term shareholder value. At Investor Day, we introduced Volt, our growth strategy. Volt reflects our ambitions and guides us as we build the Booz Allen of the future. In our next era, we will scale Booz Allen to an even greater level of industry leadership. We will be the premier partner to the federal government, continuously bringing innovation to national priority missions faster than the pace of change. VOLT stands for Velocity, Leadership, and Technology. These three words are the fundamental principles for how we are transforming to achieve our aspirations. We advance with velocity, investing ahead of emerging technology waves and expanding our market positions through strategic acquisitions and partnerships. We redefine leadership, investing in people with the right expertise to lead and scale hypergrowth businesses at the mission technology intersection. And we apply next generation technology, creating differentiated intellectual capital and property to address our clients' needs at or ahead of mission demands. Today, I am excited to tell you that Volt is underway. As we operationalize the strategy, two success factors are clear. One, we need to make decisions faster to accelerate our growth. Two, our transformation will require relentless focus and seamless integration. This is why, at the outset, we are taking an important step to address these needs. I am excited to announce that we have named Executive Vice President and Civil Sector President Christine Martin Anderson as Booz Allen's Chief Operating Officer. This appointment by the Board of Directors is effective June 1st. Christine is a proven leader who perceives opportunities amid challenges. In leading both our health team and our civil market, she has demonstrated the ability to grow and manage technology-first businesses, develop talented leaders, help senior clients transform, and integrate acquisitions, all while consistently delivering strong financial results. As our COO, Christine will play a major role involved, taking primary responsibility for accelerating firm-wide operational performance and the transformation of our business model in collaboration with leaders from across the firm. I've had the personal pleasure of working with Christine for many years. I look forward to partnering with her more closely in her new role for years to come. As a result of Christine's changing role, Rich Crow, currently Chief Growth Officer, has been named Civil Sector President. Rich is a seasoned and innovative business leader who previously led and scaled the health account to its market leading position. An accomplished leader in his own right, Rich is also an indication of the depth of talent we are lucky to have in our firm. I hope you'll have a chance to meet Christine and Rich at future events. Now allow me to share additional details on the progress we are making on Volt. Foundational to our strategy is building businesses at the intersection of mission and technology. As of April 1st, we formally launched two operational business units aligned to mission areas we believe are critical to our nation and prime for hypergrowth. We have nested digital battle space inside our global defense sector. This is where we are innovating to help the Department of Defense securely drive information to the edge to create decision advantage. By applying AI, machine learning, 5G, and other emerging technologies to the joint warfighting mission, the women and men who defend our country will have superior situational awareness to make better decisions faster. National cyber, a core element of our national security sector, builds on our leading position in the intelligence community. We have delivered innovative cyber tradecraft to these clients for decades and recognize that the cyber domain is horizontal and not vertical. Therefore, we are now extending and expanding our reach into scalable cyber solutions for a broader set of clients across the Department of Defense and civilian agencies. Our focus is on cyber network operations and protecting critical infrastructure. With the organizational launch of these two mission-centric businesses, we now have dedicated leaders and technical talent aligned to drive the team forward and deliver on a clear set of objectives. We have also taken the time to reimagine our innovation agenda. As of April 1st, we integrated our IT infrastructure and innovation functions into a newly created chief technology office led by Susan Penfield. This organization leads the way in scouting the market to select and scale the best new technologies for our clients' mission needs as well as our own. We also continue to make strategic acquisitions and investments consistent with Volt. In March, we announced the pending acquisition of EverWatch, aligned to our national cyber priority, which we hope to close in the coming months. We're also continuing to test the leading edge of commercial technology, making small investments to secure access to the next generation of breakthroughs. And finally, also as of April 1st, Liberty is fully integrated into Booz Allen and exceeding our expectations. This acquisition is strengthening our position in digital transformation and accelerating growth in the civil market. As you can see, our Volt growth strategy is more than aspirational words. Volt is both our future and our present, and the work is underway. This is critically important as we strive to meet our FY25 investment thesis goal of adjusted EBITDA growth to $1.2 billion to $1.3 billion. supported by above-market growth rates, stable margins with increased investment capacity, and significant capital deployment. Shifting now to the current fiscal year, 2023, we expect to continue strong growth at the top and bottom lines, while acknowledging significant volatility still exists in the environment. The U.S. economy, geopolitical conflicts, the post-pandemic work environment, upcoming midterm elections, and the federal budget beyond the current government fiscal year are all unknowns that we will need to navigate, creating headwinds and tailwinds we cannot fully predict. Our four operational priorities are aligned to the factors we can control. And intended to build momentum in the first half of the fiscal year, to mitigate increasing volatility in the second half. First, we must hire aggressively to fully capitalize on our record backlog and robust pipeline. Second, we must continue our track record of winning work aligned to our clients' highest mission priorities. Third, and of increased importance in an inflationary environment, we will continue to manage the business tightly looking to direct our spend towards talent and strategic priorities while delivering on our bottom line commitments. And fourth, we must maximize the value of capital deployment activities with a focus on small to mid-sized strategic acquisitions. When I consider what we have achieved in fiscal year 2022 and begin to set my sights over the horizon I know our people are and will continue to be the heart of our success. As we enter this new fiscal year and execute our strategy, we focus on empowering our team to unleash our full potential and lead the way to a better future for Booz Allen, our clients, and the world. And with that, Lloyd, over to you for a thorough discussion of fiscal year 2022 and our guidance for fiscal year 2023.

Thank you, Horacio, and good morning, everyone. We are pleased to share our fourth quarter and full year results for fiscal year 2022. Our performance highlights our strong business fundamentals and demonstrates our ability to meet expectations and accelerate growth as we exit fiscal year 2022 with broad-based momentum across all aspects of our business. Before walking you through our results, I want to frame the conversation in the context of our investment thesis. which is centered around growing adjusted EBITDA dollars by 50% through fiscal year 2025. To achieve this objective, we define long-term financial targets at our Investor Day that will guide us. First, 5% to 8% annual organic revenue growth. Second, adjusted EBITDA margins stabilizing in the mid-10s. And lastly, deploying between $3.5 and $4.5 billion in capital. As you see, our results exemplify our team's disciplined and deliberate actions to execute against these long-term objectives to drive superior shareholder value in the face of operational challenges we have navigated over the past couple of years. Let me open with a few highlights from our fourth quarter results for fiscal year 2022. Revenue growth of approximately 13 percent compared to the prior year period represents our strongest quarter of growth since before the pandemic. Specifically, we reported growth across all of our markets, with double-digit growth in three of the four markets, underpinned by our fourth consecutive quarter of mid-single-digit headcount growth as we capitalized on strong demand signals, resulting in a record fourth quarter book-to-bill of 1.66 times. Adjusted EBITDA margin was 9.2%, a decrease of approximately 60 basis points in the quarter, though still contributing to 50 basis points of expansion for the full fiscal year. This marks an exceptional year of margin performance. We maintain strong contract execution and recognize cost savings throughout the pandemic, allowing us to make strategic investments in our business and people. Lastly, we delivered strong operating cash flow of $255 million in the quarter, an increase of 418% over the prior year. This resulted in a free cash flow conversion of 197% of adjusted net income, which further expands our capacity to strategically deploy capital against our long-term growth objectives. Let's now turn to our full fiscal year 2022 results. Please turn to slide six. At the top line, revenue increased 6.4 percent for the full fiscal year to $8.4 billion, which includes $340 million from inorganic contributions. Revenue excluding billable expenses also grew 6.4 percent year over year to $5.9 billion. Our organic top line growth was driven by successfully executing on the strong demand for our differentiated solutions. supported by sequential improvement in staff utilization. Let me give some color on the market-level performance for the full fiscal year. Starting with defense, revenue grew by 2.1 percent for the quarter compared to the prior year period and 0.9 percent for the full fiscal year. Although we still have work to do, we are pleased with our team's continued efforts to improve on growth and overall performance, contributing to a meaningful turnaround this quarter. To be specific, we had several notable wins in the fourth quarter, including our $1.5 billion EMAPS II Recompete, the largest single task order in our company's history. This win demonstrates closeness to our client's mission and dedicating investments to building leading-edge technologies, which is a critical enabler of our digital battle space platform as we continue to apply our differentiated solutions in new and meaningful ways. In civil, revenue grew by 33.1 percent for the quarter compared to the prior year period and 20 percent for the full fiscal year. Organically, revenue grew by 12.9 percent for the quarter and 5.4 percent for the full fiscal year. We are especially pleased with our double-digit organic revenue growth in the fourth quarter, which highlights the growing momentum across all dimensions of the portfolio and factors a number of exciting new work opportunities, including Liberty's $735 billion DevSecOps win, which further deepens the mission-critical work we do across the VA. In Intel, we have hit an inflection point. Revenue grew 11.1% for the quarter and 1.5% for the full fiscal year. This performance reflects the efforts made over the past several quarters to reshape parts of the portfolio to the high-end technical work we want to focus on, which is yielding positive results and contributing to exciting new wins. Lastly, global commercial revenue grew 40.1% for the quarter compared to the prior year period, which resulted in a 5.1% growth for the full fiscal year. Now on to slide seven for details on our demand signals. We are extremely pleased with our exceptional book-to-bill performance for the quarter and the full fiscal year. Book-to-bill of 1.66 times is a fourth quarter record, resulting in a full fiscal year book-to-bill of 1.36 times. Total backlog as of the end of the fiscal year grew 21.7 percent over the prior fiscal year, yielding our largest ever backlog of $29.2 billion. Funded backlog grew 5.7% to $3.7 billion. Unfunded backlog grew 63.1% to $9.9 billion. And priced options grew 8.1% to $15.6 billion. These outstanding results highlight the market's strong demand signals and our ability to shape, win, and execute on mission-critical work aligned to budget priorities. With a budget in place, we are focused on working closely with our clients as they align funding outlays against their priorities. We are optimistic that we will continue to build on our strong demand results by sustaining our historical win rates for re-competes and new work while continuing to execute on our diverse pipeline of qualified opportunities. Taken together, these dynamics further cement our position as a market leader. Pivoting to headcount, As of March 31, we had approximately 29,300 employees, an increase of approximately 1,600 year-over-year or 5.7%. This performance exemplifies our ability to successfully execute on a core operational priority, to attract, hire, and retain highly skilled technical talent required to meet growing demand in an increasingly competitive labor market. As we have discussed, accelerating headcount growth with the right skilled talent is fundamental to our long-term growth objectives. Equally important, we are actively working alongside our clients to shape the future of work and continue to evolve the way in which we and our clients do business each day to build upon the success we achieve this fiscal year. Moving to the bottom line, Adjusted EBITDA for fiscal year 2022 was $935 million, up 11.3% from the prior year period. As I mentioned, our adjusted EBITDA margin of 11.2% reflects an expansion of 50 basis points over the prior year. For fiscal year 2022, margins continued to benefit from the following four dynamics. First, Profitable contract-level performance and mix, which includes inorganic contributions. Second, prudent cost management, which benefited from lower unallowable and discussionary spend. Third, a continuation of lower-than-expected billable expenses in what was an anomalous year. And lastly, a return to billing for fee largely within our intel markets. which contributed $24 million in fiscal year 2022. Full fiscal net income decreased 23.4 percent year-over-year to $467 million. Adjusted net income was $568 million, up 4.9 percent year-over-year. Diluted earnings per share decreased 21.3 percent to $3.44 from $4.37 in the prior year period. And adjusted diluted earnings per share increased 7.9 percent to $4.21 from $3.90. Both GAAP and non-GAAP metrics were impacted by higher interest expenses over the prior year and a higher effective tax rate due to the timing of strategic tax planning initiatives in the prior fiscal year. These increases were partially offset by a lower share count due to share repurchases made in line with our capital deployment strategy. Turning to cash, cash from operations for fiscal year 2022 was approximately $737 million, up from $719 million in the prior fiscal year. As we discussed last quarter, we continue to focus on consistent and sustainable strong working capital management, that aligns with our operational performance. We are pleased with our fourth quarter operating cash results and will continue our efforts with laser focus to optimize our already strong balance sheet. Capital expenditures for fiscal year 2022 were approximately $80 million, down 8 percent over the prior fiscal year, resulting in free cash flow of approximately $657 million and a free cash flow conversion rate of 116% of adjusted net income, which supports our strong balance sheet and capital deployment priorities. Please turn to slide eight. Our strong cash flow from operations and solid balance sheet capacity allows us to invest in the growth of our business and maximize shareholder value. We maintained a disciplined and patient approach throughout fiscal year 2022, leveraging share repurchases of $419 million, our regular recurring dividend of approximately $209 million, and capital deployed for strategic acquisitions and investments of $866 million, a record in our company's history. Our priorities around M&A, along with optimizing our other levers, will become an integral part of achieving our long-term growth objective. Today, we are also pleased to announce that the Board has approved a quarterly dividend of 43 cents per share, payable on June 30th to stockholders of record on June 15th. Turning to guidance, please move to slide nine. For fiscal year 2023, our guidance outlook is centered around growing adjusted EBITDA to $950 million and $1 billion. We expect to achieve this by delivering revenue growth between 5% and 9%, which includes 1% of inorganic contributions from Liberty and TracePoint. Achieving adjusted EBITDA margins in the mid to high 10% range, which reflects our long-term expectations for an incremental step down in margins as unallowable spend and billable expenses continue to normalize, and make strategic investments in our business to fuel growth. and generating between $850 and $950 million in operating cash flow, which will fuel the investments we need to make in our business and the capital we seek to deploy to achieve our long-term objectives. As shown on slide 10, this guidance does not reflect our expectations for significant cash tax payments this year, given the volatility we expect to experience. Specifically, we expect to pay approximately $550 million in cash taxes in fiscal year 2023, which includes approximately $150 million associated with Section 174. Inclusive of cash taxes, we anticipate our total operating cash flow for fiscal year 2023 will be between $300 and $400 million. Additionally, at the bottom line, We expect adjusted diluted earnings per share of between $4.15 and $4.45, as shown on slide 11. This range reflects strong operating results inclusive of inorganic contributions, incremental depreciation, and amortization expense related to investments in our technology and infrastructure, a higher interest expense, and a higher effective tax rate. This guidance is based on an assumed 131 to 133 million weighted average shares outstanding, a tax rate in the range of 23 to 25 percent, and interest expense in the range of 108 to $117 million. And finally, we expect capital expenditures to remain in the range of 90 to $110 million as we continue to meaningfully invest in our infrastructure and technology. In closing, I want to thank our entire Booz Allen team for their relentless dedication to our mission, helping us deliver value for our clients while continuing to navigate the challenges that came our way throughout the fiscal year. We have built solid momentum across our markets, and as we enter fiscal year 2023, I am confident in the premium quality of our offerings and the strong fundamentals of our business. I believe we have the right team, vision, and strategy in place to execute on our long-term objectives of delivering strong organic growth and driving superior shareholder value. With that, Laura, let's open the lines for questions.

Thank you, Lloyd. Operator, please open the lines.

Thank you. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. In the interest of time, please limit yourself to one question and one follow-up. Our first question comes from Sheila Kayaluku with Jeffries. Your line is open.

Good morning, Horacio Lloyd. Thank you for the time. So congratulations on the inflection in revenue growth. You guys have been talking about it for a few quarters now. What drove that? It seems like things came together all at the same time, whether it was the EMAP contract being awarded, the re-compete, strong civil growth? And, you know, how do we think about that 5% to 9% revenue growth for 2023 in terms of the business segments or verticals?

Hey, Sheila, good morning. Thanks for the question. Let me maybe take a step back and frame last year into this year and beyond, if that's okay. And I'm sure Lloyd is going to want to add You know, I think we went into last year, we're very pleased with the results, obviously. But having said that, you know, there was a fair amount of volatility in the environment that I don't think we fully captured in our guidance a year ago. And so we've been thinking about that and making sure that we are doing that into this year and beyond. As you looked throughout the year sequentially, we hired really well. We won a lot of work. And really all of our markets began clicking on the growth posture that we expect them to have. And that needs to continue for sure into FY23. If you look at an FY23 guidance, we're trying to do two things. One is we're trying to be respectful of the fact that the volatility in the environment that we saw last year will not abate this year. And so we need momentum in the first half because we expect the second half to be somewhat more volatile. To reach this 5% to 9% growth rate, we're really focused on organic growth and on organic growth across all of our markets, not one versus the other. And the priorities are what I mentioned before. We need to hire. We need to win work. We need to continue to manage our cost base so that we can be sure we have the resources to reward our talent and retain our talent. And then we really need to make smart capital deployment decisions so that we can actually make acquisitions this year that will propel growth into the future. If I look at it all together, and maybe to wrap up my part of the answer to this question, is to say we're on track on the multi-year investment thesis because we are really focused on organic growth and we're able to deliver it.

Sheila, thanks for the question. You know, as the pertains to guidance, there are a couple of dynamics we wanted to stay true on. One is that we're well positioned, we wanted to capitalize on the strong momentum, and we wanted to stay true to our investment thesis. And last October, what we said was we were focused on adjusted EBITDA dollars. So as we exited 22, our range of $9.50 to a billion says to us that we're on track. And when you look at each of the ranges for the components, you'll also notice that it's a little bit broader than what we historically have done. And we attempted to take into account all those elements that Horacio mentioned that in previous years we probably didn't get quite right. We identified them, but not the impact. So, the five to nine in revenue, from our perspective, is returning to that organic growth objective, being the leader in the sector that we have been in the past. The margin of mid to high tens, as I said in my prepared comments, really is a reflection of returning to a more normalized environment, some of the dynamics with billable expense probably shifting a bit, being more of a headwind, same with unallowable costs, and the opportunity to invest in the business areas that we highlighted last October. Cash. you know, the operations are generating solidly. So, our range of 850 to 950, excluding cash tax payments, we feel it's really going to give us the flexibility to do what we need to do. And, you know, the cash tax is really a timing issue. I mean, this year, 400 of it is really going to be income tax expenses with a higher tax rate, effective tax rate, and 150 for that Section 174 legislation. And then lastly, with ADEPs 415 to 445, also a reflection of higher tax rate, a bump up in interest expense, and the diluted shares outstanding. And just as a reminder, this is why we're focused on adjusted EBITDA dollars. You know, we recognized last year that we were going to have some things impacting the bottom line that we're going to be outside our control. So we think the guidance is on track. It's consistent with our investment thesis. And we're off to a good start.

Thank you both for that. Just one follow-up, Lloyd. That $400 million of cash taxes, you know, it seems one-time in nature. What do cash taxes normalize to in terms of the cash tax rate going forward?

Yeah, you know, this year we're going to have headwinds. We suspect at a point in the future it'll come back to us. So we felt that bridging it for everyone today so that, we don't have to revisit it in the future. You'll see sort of what the dynamic is. So it's a little bit of a crystal ball, Sheila, in terms of where it actually will normalize, but certainly the upward trend, there's an upward trend to it.

Okay, thank you.

Thank you. Our next question comes from Gavin Parsons with Goldman Sachs. Your line is open.

Hey, good morning. Morning, Gavin. Lloyd, if I could just stay on the cash taxes for a minute there. Could you give a little bit more detail just on what exactly is driving that, given it looks like that's almost double your gap tax rate? I mean, is that something that you've underpaid over the last few years, or are you prepaying for the next few years?

Yeah, you're exactly right. In the past, we underpaid. And so, again, back to my answer to Sheila. expected to come back. So it's really a timing issue. We've had a pretty strong strategy around taxes over the years. And, you know, payments comparatively were lower in the last two years due to the implementation of our strategic tax initiative. So we do expect normalization as the benefits from our ongoing initiatives are recognized.

And I know you said it's a bit of a crystal ball, but is this the cumulative amount of underpayment, or do you think you still have some to go in the future?

Probably some more to go in the future, but it is what it is right now.

Okay, thank you. That's helpful. And then maybe on headcount growth, I know 4Q is not typically the strongest hiring quarter, but maybe if you could discuss that. you know, why headcount didn't grow sequentially in the quarter and what you're assuming for headcount growth in fiscal 23.

Why don't I start? I mean, obviously, this is our top operational priority is to attract and retain the right people in the business. And we feel we're doing very well against that. If I'm not mistaken, we're at 5.7% year over year. headcount growth for FY22. You know, we always start at the single-digit headcount growth, and to meet our organic growth requirements, we'll do the same thing in 23. The Q4 numbers, as you pointed out, first of all, that's not typically our strongest hiring quarter, but the other thing is as we continue to control costs and make sure that we're doing the right thing there, What you don't see in the numbers is a shift from non-billable staff to billable staff that happened throughout the quarter as we hired more in one area and we managed down some costs in the other area.

Okay. Thank you both.

Thank you. Our next question comes from Louis de Palma with William Blair. Your line is open.

Good. Good morning, Horacio, Lloyd, Laura, and Megan. And congrats, Christine, on your appointment.

Thank you. Thank you for that. We're very excited about that.

For the EMAPS recompete, is the ceiling double the previous ceiling? And was the original contract expected to end in 2023?

The ceiling is expanding greatly. I haven't done the math precisely, but I think there's at least a half a billion dollars of new ceiling in there as the mission, the scope continues to expand, and frankly, the impact of our work makes our clients need and want more. As you know, we were expecting this to be done earlier in the year, but it's... We're poised to ramp up there. I think it underlines why we are confident the growth of our defense business this year. And, again, it's obviously financially important, but it's also strategically important because this is the type of work we want to do. At the center of the mission, driving both mission priorities and technology into core key missions, that are going to need it and are going to be transformed by it. And I think we've pointed out this may be the largest single task order in the history of Booz Allen, so we're excited about that.

Great, Horacio. And it seems that you're investing significantly in this area. You established the partnerships with Cintiq and Reveal. And following this successful renewal, I was wondering, how are your other data analytics programs progressing, such as during your analyst day, you highlighted Project Rainmaker with the Army, and you've also highlighted your ADVANA platform that you co-developed with the DoD. I was wondering, you know, broadly, how all of your initiatives with AI are progressing. Thanks.

Thank you for remembering what we talked about yesterday with such clarity, Louis. Sometimes it's hard to tell if people are going to remember everything we talk about, so I'm really appreciative of your attention to all of this. You know, I think this all falls into the rubric, generally speaking, of digital battle space and the work that we are doing to knit all of these legacy systems and new technologies in the department to give the warfighter a decision advantage. And that's, you know, Havana is more of a headquarters play on that. Rainmaker is a data fabric that is supposed to go headquarters to the edge. A lot of the work that we're doing in digital battle space is around building the IP and IC that would allow us to have a unique position. in this notion of creating the data fabric that connects all of the systems and gives the warfighter what they need from a data perspective. And then on top of that, we want to make sure that we're building the AI tools, resources, algorithms to make that information valuable real time. A couple of the small investments that you described are all under the rubric of the work that we're doing in the CTO office to make sure that we're really scanning the what's happening in the commercial markets, what are the new technologies, the new thinking, and how do we make sure that DoD has access to that real time? So we're talking about one is a company that does synthetic data because, as you know, you need that to build these models and to train the models faster, algorithm compression so that we can actually push that to the edge and the like. So, you know, we're obviously very bullish in that. This is one of the areas we're talking about for Volt, for hypergrowth, that will fuel not just 23, but 24, 25, and well beyond.

Sounds good. Thanks, Ross.

Thank you.

Thank you. Our next question comes from Matt Akers with Wells Fargo. Your line is open.

Yeah, hi. Good morning. Thanks for the question. I guess a couple more on the revenue kind of walk year over year. Is it possible to size how big the Middle East, North Africa is? business was, and then I guess for EverWatch, can you say how big that was and just to verify, you're not including that in the guidance yet, or are you?

Yeah, I'll start. I mean, on the Middle East business, it's small. It's not going to shake up the financials in any kind of way. On EverWatch, I really can't give you much more today until we close, and We remain confident that we're going to get there. It's not included in the guidance that I provided earlier. Got it.

Okay. And then I guess just on debt, you know, interest up a little bit in fiscal 23, you know, you guys have a little bit of variable rate debt. Is there a chance of changing your Sort of thoughts on, you know, fixed versus variable rate debt or maybe hedging going forward given, you know, some of the moves in interest rates there that we're seeing?

Yeah, no, it's top of mind for sure. Today it's 67%, 33%, fixed to floating. We're looking at it in light of interest rate movements, and it'll also be part of how we think about our future financing, certainly in the near and the midterms.

Okay, yeah, thank you.

Thank you. Our next question comes from Kai van Roemer with Cowan. Your line is open.

Yes, thank you so much. So book-to-bill was, if you take out the acquired backlog, looks like it was about 1.4. Could you give us some color on the demand, you know, trend you're seeing now and also your funded book-to-bill was pretty anemic, not quite as bad as khakis. And any trends you're seeing, are things continuing to pick up as we go into the current quarter?

Yeah, I'll certainly start, Guy. As we've been saying for quite some time, even though I may not have felt like it previously, the overall market and the demand signals have been pretty solid. I think we did see some program slippage. I think others talked about that, too. But with the budget in place, we're seeing a pretty robust RFP season. As you can see in our disclosure, our win rates for re-competes still holding at 90 percent for new work in the low 60s. Our dialogues with our clients of both existing tasking and future tasking is also pretty robust, and you also saw a pickup in price options, we see as a leading indicator to our client satisfaction with Booz Allen, but also their confidence about what they'd like to do going forward. Then lastly, the pipeline is extremely robust. Backlog's up 22% year over year, and so we feel good about all of that. In terms of the mix of funded and unfunded, over the years, that sort of ebbs and flows, and it's really a function of timing, and as clients sort of think about their priorities and maybe shift a little bit. Average contract size tends to be about five years, and so we've got large, increasingly larger and larger technical work, and so we're going to see some of that bump around. But I think you nailed it in your opening question. We really internally look at the trailing 12 months, and if it's north of 1.2, we're feeling pretty good, and to be at close to 1.4 times, That just further tells us we've got strong demand signals.

Yeah, if I can build, and it's just in a couple directions of what Lloyd is saying, you know, as we've been saying for a while, we're not demand constrained. We appreciate the volatility in the environment, which is why we're really focused on the first half of this year on building momentum. And from a growth perspective, I was reflecting the other day on the fact that we are fast approaching 30,000 people, fast approaching $30 billion in backlogs. So the number 30 is something good for us. And it speaks to the growth that we both have been able to generate and we aspire to create under Volt. And in my prepared remarks, I tried to take you through some of the leadership changes, organizational priorities, and investments that we're making to ensure that this acceleration of organic growth that we're talking about in 23 continues into 24 and 25.

Thanks so much. Turning to headcount, your headcount was up, but how far was it up organically? It was down sequentially. Are you having any trouble hiring? You said you're not demand-constrained, but are you supply-constrained?

I think we have consistently said it's a tight labor market. That remains true today and into the future. We saw a 2.8 organic growth in our headcount, and we're very pleased with that, just given the tightness in the market. As Horacio said, we did have some staff departures, but actually that was a part of, you know, deliberate cost synergies that also sort of nudged it down sequentially. So what are we doing about it? Got a very aggressive referral program. We're increasingly reaching out. To our traditional and nontraditional sources, the overall pipeline of candidates has been growing. And because of our culture and because of the recognition we've gotten widely, we are seen as an employer of choice. So we remain optimistic that back to targeting mid-single digits this fiscal year, that we're going to get increasingly closer to that. But it still remains a very tight labor market.

Yeah, Kayemi, as you know, this topic of talent is near and dear to my heart and has always been. I would say there's three things we're laser-focused on. The first one, as Lloyd said, we're controlling costs writ large to make sure that we have the resources to reward our people, to retain our people, to compensate in a very tight labor market. Two, we are continuing to invest in our environment and in our culture. People are now able to return to the office in a much more flexible way. We're hearing really good things about that. And again, the culture of Booz Allen has always been a differentiator. And three, ultimately, the work that we are doing keeps people here, wants people to come here. I opened a call today. talking a little bit about the work that we're doing to support the U.S. government on what's happening in Ukraine. That's the type of work that makes the people working on it proud, but it makes us proud, and it makes people want to come to Booz Allen to be part of those missions.

Thank you very much.

Thank you. Our next question comes from Colin Canfield with Barclays. Your line is open.

Hey, good morning. Can you just discuss your organic guide in the context of the multi-year growth target cadence? You said that you're on track for your investment objective, but you're underperforming the mid of the previous organic growth target of 6.5%. So then as we think out, you know, kind of on a multi-year period, you know, what sort of hiring do you need to accelerate or what sort of hiring do you need to see to accelerate above this year's organic guide?

Yeah, we're looking at a 4% to 8% range organically, the midpoint of which is significantly north of our exit in 22. And to Kai's question, if we're able to hit mid-single digits in terms of bringing on the talent, we think the conversion of our very strong backlog puts us solidly in that space. You know, momentum is building. We feel good about the demand signals, as I mentioned earlier. We're going to continue to make recruiting and onboarding our top operational priority, which will put us, we believe, in those ranges.

Got it. And then with respect to the 1% inorganic growth contribution this year, can you just talk a little bit about the valuation framework that you're looking at in terms of your capital deployment strategy? Is there a good – payback period to think about, or if you think about, you know, how's your investor day targets, kind of what's the updated inorganic placeholder we should be considering for adjusted EBITDA?

Yeah, the 1% is a reflection of our past commentary on M&A. Liberty has been fully integrated as of April, as well as TracePoint. So this year we saw about $340 million of contribution from those guys to our overall performance. So, on a go-forward basis, we're obviously looking at the financials, but our priority around M&A is, is it strategically going to accelerate our growth? Do we have strong cultural alignment? And then, do the financials make sense? And in the case of Liberty and TracePoint, both of those were gates great case studies as to how we get there or where we want to be.

Our next question comes from Seth Seifman with J.P. Morgan. Your line is open.

Hey, good morning. Thanks very much. Good morning. Lloyd, can we dig into this tax issue a little bit more? Because when I look in the 10-K issue, It doesn't look like the cash tax payments have been lagging significantly behind the gap. And then if I think about this year's cash tax payment, let's put aside the R&D issue, which nobody knows if that's going to stick around or not. But even putting that aside, it's like a 50% tax rate. And so when you think about where should it go going forward, and it seems like maybe you know, it's still going to be elevated or, you know, moving north or something like that. I guess, can you help us level set there a little bit more?

Yeah, you know, the timing of our past tax strategies has put us, you know, in the 22 to 24 percent range. Going forward, we expect it to be at the upper end of that, 24 percent. So, in the past years, we were successful in managing our taxes for the long term and able to drive the tax rate down. Obviously, pending legislation and things of that sort, we're seeing it going in the other direction. So I'd take a little pushback a little bit on the 50%. The effective tax rate is more in that 23% to 25%, but we've got these additional dynamics as it pertains to the legislation that bumps it up.

Okay, just to just to understand, though, the tax rate, like if we cash taxes would be 400. If not for the is and let's let's put aside the the R&D issue, cash taxes would be 400. Without that.

Correct. Correct.

Okay. Yeah, okay. Okay. And and pre tax, pre tax income was something like 750 or so.

Yeah, we've got, in terms of our operating cash, we've got 850 to 950, which, back to my prepared remarks, really to us indicates that the operations are solidly generating what we would expect.

Okay. And so if we think to the out years, should we think if the GAF tax rate is 24% that your cash taxes should be in line and there would be, you know, really no changes or no inflows or outflows showing on the cash flow statement, or the cash taxes might be different?

Yeah, I think you got it right. I mean, that is true, but we're also going to see some things come back to us given, you know, our strategies that we've had. So we really see that the timing of payments is really the dynamic that we're grappling with, and we wanted to Disclose that to you all so that you're able to sort of model it and understand it.

Okay, great. Thanks very much.

Thank you, and that's all the time we have for questions. I'd like to turn the call back to Horacio for any closing remarks.

Thank you very much. Thank you all for your questions this morning and for joining us. I hope in the last hour we gave you the additional insight you need to be able to see how well we're doing both delivering financially and transforming strategically under Volt. We are undergoing a lot of planned change, and I am very proud of that. But maybe in closing, the important thing is also to talk about what doesn't change. And The top thing that does not change at Booz Allen is our purpose and our values. We're now almost 30,000 strong and the people of Booz Allen are as committed as always to empowering each other and everybody around us to change the world and to live our values out loud. And that makes being recognized by Forbes as number three among the top 500 best employers for diversity particularly meaningful. You know, the diversity of our workforce, it reflects our values, and it enables us to attract and retain exceptional talent. I believe that a diversity of perspectives, ideas, and experiences are key to achieving the ambitions that Lloyd and I described for you today. And I'm extremely optimistic about the future of Booz Allen, and in large part because I get to experience the passion and the quality of our people firsthand each and every day. So once again, thank you for being with us today, and have a great day.

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