Booz Allen Hamilton Holding Corporation

Good morning and thank you for standing by and welcome to Booth Allen Hamilton's earnings call covering third quarter fiscal year 2024 results. At this time all participants are in a listen only mode. Later there will be an opportunity for questions. I would now like to turn the call over to Mr. Nathan Rutledge.

Thank you. Good morning and thank you for joining us for Booth Allen's third quarter fiscal year 2024 earnings call. We hope you had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on slide two. With me today to talk about our business and financial results are Horatio Rosansky, our president and chief executive officer, and Matt Calderon, executive vice president and chief financial officer. As shown in the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning are forward-looking and may relate to future events or 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 SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future 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 for non-GAAP measures to the most comparable GAAP measures in our third quarter fiscal year 2024 earnings release in slides. It is now my pleasure to turn the call over to our CEO and president, Horacio Rosansky. We are now on slide four. Thank you, Nathan.

And good morning, everyone. Thank you for joining us. Matt and I are very excited to share excellent financial results with you today. Boos Allen's record-breaking fiscal year continues. Our best first half has now extended into our strongest three quarters of growth since our firm went public in 2010. I am so proud of our team. Thanks to their efforts, we have achieved the strategic and operational momentum we aim for under our bold strategy. Our financial performance has been remarkably consistent. This quarter, we continue to deliver industry-leading double-digit organic revenue growth. We remain ahead of pace on our multi-year investment thesis and, again, expect to exceed our guidance for the fiscal year. Given the continuing uncertainty in the market, from ongoing budget debates, geopolitical conflicts and the upcoming election, our clear focus remains to accelerate momentum and increase resiliency across our institution. Matt will take you through the full details of the quarter and our outlook for the rest of the fiscal year. For the remainder of my remarks, I will focus on putting our continued success in the context of our bold strategy. Let me begin with a little historical context. 2024 is Boos Allen's 110th year. Since our earliest days, we have embraced continual transformation as an imperative for relevance in the market and long-term growth. From World War II to the Apollo missions to the advent of digital government, Boos Allen anticipated the next waves of change early and transformed to meet the needs of each moment. Our goal has always been to stay a step ahead of our clients' requirements and help them drive their own transformations. Our firm has outperformed the market for decades because of four primary differentiators. Our ability to anticipate and adapt. Our capacity to invest and innovate. Our position on critical national missions. And most important, most important, our exceptional talent. All these factors hold true today. The current iteration of our century-long transformation journey is called VOLT, which stands for Velocity, Leadership and Technology. We have been implementing this program for the past 24 months. The strategic aims of VOLT are to get faster and elevate our client impact, which in turn accelerate our growth and drive exceptional shareholder value. Our third quarter results demonstrate a few important things about our strategic progress. First, we have built resilience and driven momentum into the business, even as the external environment remains dynamic and uncertain. Second, we have strengthened our leadership position in the market as we transform missions of national importance with emerging technologies. And third, we have gained speed and efficiency in how we operate and grow our workforce. In sum, our VOLT strategy is working. As examples, let's look at two key missions we are transforming and at the amazing people who do this work. First, China. The National Defense Strategy describes China as DOD's pacing challenge and it outlines the top priorities to strengthen the U.S. deterrence mission. The sheer geographic scale of this mission, which encompasses nearly half of the Earth's surface, creates both urgency and unique complexity for our clients. Through years of investment in the right technologies, talent, and partnerships, we are more prepared than ever to help our clients translate urgency into speed at scale. Today, we have more than 600 employees in the Indo-Pacific region working across various aspects of this mission. We have also forward deployed our innovation ecosystem. This provides our clients with faster, more direct access to our services and more efficient access to emerging technologies. Our client focus is on accelerated readiness, supporting allies and partners, and bringing AI and cyber to key mission priorities. While there is much work to do, we are already having impact. A relevant public example is our recent win of a small but strategic contract to build a private 5G network for the United States Navy in Guam. This work will leverage our early investments and expertise in 5G, edge computing, and zero trust to support secure communications, operations, and logistics on the island. Finally, I'll note that our first focus on the pacing challenge is not limited to our growing presence in the Indo-Pacific. Leveraging our lessons from Ukraine and other conflicts, we are considering how to tailor our solutions across all of our sectors. And given the scale and complexity of the China mission, we are also engaging our network of technology partners to mount an -of-nation approach. In short, we are deeply committed to helping our clients defend U.S. interests. Because this is a long-term priority for our nation, it will be a long-term priority for Booz Allen. Pivoting next to our health business. For more than a decade, Booz Allen has been at the heart of many federal health care transformations. For example, we have worked to modernize care and benefits delivery for our veterans, implement health reform, and accelerate how lifesaving drugs are safely brought to market. Through the strength of our work across these and many other missions, the health portfolio has crossed the $2 billion annual revenue threshold. Today, building on that success, we are poised to help our country transform the future of public health. Our recent win of the Data Modernization Accelerator Contract, or DMACC, at the Centers for Disease Control is a tremendous opportunity to improve data interoperability across the public health ecosystem. Our years of innovating at the VA and our early investments in cloud, machine learning, generative AI, and cyber positioned us well to win this work. Now, Booz Allen is playing an integral role in helping the CDC unlock the power of data at scale so our country can better prepare for and respond to critical public health emergencies. I've just described a small sample of the work we do at the center of the missions that matter most. More broadly, we are leading the way in redefining intelligence collection, implementing zero trust, and preparing for a post-quantum world. We are also focused on accelerating U.S. space superiority by harnessing data to speed decision making and mission outcomes. To that end, we recently made a venture investment in a company called Albedo to leverage their leading edge imagery capabilities as new data collection sources for our clients. The strategic importance of all these missions, coupled with our outstanding execution, build resilience in our business, and our relentless implementation of volt drives our momentum. Today, we are exactly where we want to be as we live our purpose to empower people to change the world. Because, more than anything, at our core, we are a company of purpose-driven professionals. People join Booz Allen because they have a passion for doing world-changing work. People stay at Booz Allen because we invest in them and provide unique opportunities to solve tough challenges inside essential missions. Simply put, our people catalyze the potential of Booz Allen. So my final point on our success with volt connects to our record headcount growth over the past six quarters. This is the result of intentional and focused efforts of our recruiting and business leaders to transform our talent acquisition processes. We are hiring, onboarding, and moving our talent to the missions they are passionate about faster than at any time in our history. These process improvements, combined with our increased investment in talent, create the conditions to grow our headcount at speed. This is crucial to accelerating our overall growth, which allows us to continue to invest and outpace the market. It is incredibly gratifying to see how volt is fully woven into our business and evident in the results we share today. We recognize that the hiring market and other macroeconomic conditions have improved in recent months. Even in a strong market, our outperformance, headcount gains, and new opportunity capture are the outcome of the purposeful empowerment of our leaders to take action in alignment with our strategy. And with that, Matt, I'll turn the call over to you.

Thank you, Horacio, and thanks to all of you for joining our call today. I will start by saying that I am incredibly proud of the financial performance we are reporting today. Our third quarter results are further proof that our volt strategy is working and Booz Allen continues to build momentum. We are investing in cutting-edge technologies, hiring the right people, building critical partnerships, and winning work at scale. These strengths are the source of confidence and resilience in our business. As Horacio noted, we have now recorded the strongest first three quarters of a fiscal year since our IPO. Our performance has been remarkably consistent on the supply side, on the demand side, and in how we are operating the business. Based on this performance, we are ahead of pace against our three-year investment thesis, and we are especially pleased to raise our fiscal year 2024 guidance again today. Now let's dive into the details. Please turn to slide 6. Total revenue for the quarter grew .9% -over-year to approximately $2.6 billion. Organic revenue was up .8% -over-year, and revenue excluding billable expenses increased 13% -over-year to approximately $1.8 billion. This exceptional top-line performance was fueled by our strategic position in the market, robust demand for our services and solutions, and our ability to attract and retain elite talent. Taking it now sector by sector, our defense business continues to excel. Revenue was up roughly 17% compared to the third quarter of the last fiscal year, and this performance is strong and broad-based. Our team remains focused on accelerating access to data and decision-making tools and providing next-generation solutions to warfighters on critical missions across the globe. Our civil business is also growing fast, up roughly 18% -over-year with double-digit growth across the portfolio. Booz Allen is unleashing the power of data to achieve better and faster mission outcomes for our civil government clients, from health and life sciences to infrastructure and climate. As anticipated, the pace of growth in our intelligence business slowed in the third quarter. Revenue declined 2% -over-year. Our Intel leaders are winning exciting new work in key mission areas and have had success retaining critical talent, people who can now support cyber missions across the firm. This business is on a strong vector for the future. Finally, our global commercial business, which represented 2% of revenue in the quarter, was down about 22% -over-year. This reflects divestitures disclosed last fiscal year and overall softness in the commercial cyber consulting market. Moving on to bookings on slide 7. The award environment is strong and our market leaders are doing an outstanding job shaping and winning work consistent with our Volt strategy. Despite uncertainty about the near and long-term budget environment, our government clients and the people of our country are doing their best to meet the country's urgent mission needs. This quarter, net bookings totaled nearly $1.9 billion. Our third quarter -to-bill was 0.72 times, our best third quarter -to-bill since fiscal year 2018. Our trailing 12-month -to-bill was 1.41 times, well above our trailing five-year average. Total backlog as of December 31st stands at $34.3 billion, up .2% -over-year. Funded backlog grew .4% to $5.2 billion. Unfunded backlog declined .2% to $9.2 billion. And price options were up .3% to $19.9 billion. In sum, demand is strong. We have a solid foundation to remain the industry's organic growth leader. Turning now to headcount, Booth Allen closed out calendar year 2023 with nearly 34,000 people. Total headcount is up .6% -over-year, and client staff headcount is up 9.2%. We efficiently deploy our people on contracts and ensure they are empowered to succeed. This people-centric culture, including continuous investments in our employees, furthers their commitment to Booth Allen and in turn makes them ambassadors to future talent. Since the start of the fiscal year, client staff has increased more than 6%, exceeding our expectations as well as the -5% target we had set for the year. This level of client-staff growth, combined with our healthy bookings, positions us well for the next fiscal year. Moving now to the bottom line, we earned $291 million in adjusted EBITDA in the third quarter. This is .1% higher than the third quarter last fiscal year. Our adjusted EBITDA margin of .3% was roughly 60 basis points higher than for the same period a year ago. As you may recall, we managed the business on an annual basis. We indicated last quarter that we anticipated a somewhat flatter quarterly margin profile than in recent years. This pattern played out as we expected in the third quarter. Booth Allen pursues complex work that sits at the center of a client's mission and at the top of the technical stack. This requires us to invest ahead of the market. The quality of our work, coupled with our ability to get scale out of the business even as we ramp up investment, allows us to consistently deliver superior financial results. Third quarter net income was $146 million. The -over-year increase of .6% in net income is primarily a result of the legal reserve of $124 million recorded in the third quarter of last fiscal year. This is partially offset by an increase in our provision for income taxes associated with the reversal of an uncertain tax position related to Section 174. Adjusted net income increased .4% -over-year to $184 million. This excludes the impact of the legal reserve and the increase in our provision for income taxes. Due to the same factors, diluted earnings per share grew .6% -over-year to $1.11. And adjusted diluted earnings per share increased .8% -over-year to $1.41. Moving now to the balance sheet, we entered the third quarter with $602 million of cash on hand. Free cash flow for the quarter was $211 million, the result of $234 million of cash from operating activities plus $23 million of CapEx. Collections were strong for the quarter and included some payments we expected to receive in the fourth quarter. Cash outflows remain consistent with our outsized growth and sizable investments in our people and capabilities. In the fourth quarter, we had a net debt of $2.8 billion. Our net debt at the end of the third quarter was approximately $2.8 billion. And our net leverage ratio was approximately 2.5 times adjusted EBITDA for the trailing 12 months. Turning to capital deployment on slide 8, we returned close to $156 million of capital to shareholders in the third quarter. We also returned $156 million in share of purchases at an average price of $123.52 per share and $62 million in quarterly cash dividends. Today, I am pleased to announce that our board has approved a 4-cent increase to our quarterly cash dividend. This dividend of $0.51 per share will be payable on March 1 to stockholders of record as of February 12. Now for a look ahead. On our last call, we updated our four-year guidance to incorporate both the momentum we had built and the strong possibility of a two- to four-week government shutdown. Our revised guidance reflects the strength of our third quarter and the continued momentum of the business. While there is still uncertainty about government funding, we now believe that a multi-week government shutdown is significantly less likely to occur in our current fiscal year. Thus, we are no longer including a material shutdown-related contingency in our guidance. Let me now take you through our updated Fiscal Year 2024 guidance. Please turn to slide 9. At the top line, we now expect revenue growth of 14 to 15 percent, 13 to 14 percent of which will be organic. We are raising our adjusted EBITDA guidance to between $1.155 billion and $1.175 billion, which equates to approximately 14 to 16 percent growth year over year. This implies an adjusted EBITDA margin of around 11 percent. We are also increasing our ADEPTS guidance to a range of $5.25 to $5.40 per share. This is driven by the increase in EBITDA and a modest decrease in our ADEPTS tax rate, which we now expect to be between 22 to 23 percent. We are raising our guidance for net cash provided by operating activities to be between $200 million and $275 million. This range includes a roughly $25 million increase in our estimated Fiscal Year 2024 cash taxes related to Section 174. And finally, we still expect capex of roughly $85 million, and we now expect free cash flow to be in the range of $115 million to $190 million. In closing, our business is performing exceptionally well. We have just delivered the best three quarters since Booz Allen's IPO, with remarkably consistent performance, even in the midst of geopolitical and macroeconomic uncertainties. This is a real testament to the quality of our leadership and the power of our Volt strategy. Our firm is on a sustainable quality growth path. The energy at Booz Allen is palpable. Our people are excited about the work they do, the impact they have, the strong performance we have delivered, and the many opportunities that lie ahead. With that, Operator, let's open the line for questions.

Thank you. And as a reminder to ask a question, simply press star 1-1 to get in the queue. One moment for our first question. It comes from the line of Sheila Kajalgu with Jeffreys. Please proceed.

Good morning. Good morning, Horacio and Matt. Phenomenal quarter. Good morning, Sheila. Thank you. Really amazing. Just wanted to maybe think about the growth trajectories in terms of my question, starting with Sibyl. You know, double-digit growth for eight quarters now. Can you give us a little bit more detail about what's driving that? And then how much of that is related to public health and the T4NG program and what Booz is doing in the next phase of that program?

Sheila, I take that one. And great headline, by the way. But let me start by maybe framing the whole performance and then I'll be happy to go down into Sibyl. You know, at the firm-wide level, these have been the best three quarters and we're on track for the best fiscal year since going public in 2010. And frankly, I go back further than that. And this is as good as I've ever seen. And the performance has been remarkably consistent. And if anything, we've been positively surprised by the strength of our talent acquisition and retention program, which really, as you know, fuels our revenue expilables, which is the most important part. It does feel like as an organic growth leader, we're in this virtual circle of excellent work, allowing us to capture exceptional talent, which deliver great results for our clients, which deliver great results for our shareholders, which allow us to invest in the next wave of technologies and so on and so forth. So, you know, in short, Volt, which is our commitment to strategy, is working. And we are creating resilience and momentum in the business, even as we see the reality of an uncertain budget and funding and political season ahead of us. And so really at the firm, so let me talk about civil and I'll come back. You know, our civil business has been a star in our portfolio for, as you said, multiple years. In the early years of that amazing run, it really was driven around public health and some specific agencies in there. But really, as we look at the business now, we are a leader in digital transformation. We're a leader in cyber and in AI, and that is broad based across the entire portfolio. So while, you know, as I said, you know, our health business now has crossed the two billion dollar mark and is certainly the larger part of this business, all elements from citizen services to law enforcement. And it's all really working together, humming together to produce the results that you see. And you didn't ask, but the same is true in defense. And we really see real momentum and growth opportunity also building in our national security business. So, you know, I guess maybe to close out a little bit and bring it all together. 110 years young is Booz Allen. This business is as vibrant today as it's ever been.

Thank you for that. And I knew you'd like the title. In terms of just another one for you, somewhat related to the top line, but your margins are pushing ahead of your long term targets, essentially. And there's been a lot of discussions about the government contracting differently. So do you think the government is paying a premium for Booz, just given the service offering?

Yes and no. I mean, I do think that we and we've done this for years. We operate at the top of the market in terms of the capabilities that are required, the talent we need to bring, the investment we need to make. And so that will, over time, you know, create higher economics. That is not true on every procurement for sure. But on average, there is some truth to that statement. I do think that the reason on the margin front that we're ahead of pace on our three-year investment thesis is that we knew this was going to be a heavy investment period. I don't think we fully anticipated how much efficiency we could create in the business to be able to invest from inside that efficiency and reinvest in the business from there, which has allowed us to preserve margins, even as we invest in talent, in capabilities and in positions that I think hopefully will fuel the next round of growth.

Great. Thank you.

Thank you. One moment for our next question, please. The question comes from the line of Bert Sobin with CFO. Please proceed.

Hey, good morning and thank you for the questions. Good morning, Bert. Good morning. Horacio, just to follow up to some of your comments there, you know, around the business positioning and growth, you've seen your staff headcount rise, you know, about 10% -over-year and organic growth is now in the teens levels relative to that 5% to 8% longer-term expectation. As you think about that expectation, does that continue to be your view toward how the business should grow over time or is something in your mind, be it AI or the geopolitical risk backdrop, accelerated how you think foods can grow, you know, over the medium and long term?

You know, I think

what

you're seeing right now, as I said, is the strength of our talent acquisition process, the ability to make investments in people and a culture that keeps people here coupled with a good environment out there and this unique positioning that we have around bringing technology to mission. I don't think that is a one-quarter or two-quarter or three-quarter deal. I think this is something that if you extend it back, it goes back at least a decade or more. And if you extend it forward, I think that this unique positioning is going to continue to allow us to outperform the market. That leads to the next question, which is what is the market and how long will this type of market sustain? I mean, I think we are honestly very, you know, we appreciate the uncertainty in the funding environment. CR is, you know, running out in March, an election year, a political season that is going to add uncertainty to all of this. And we're watching that closely. One thing that is different this time than we've seen in the last couple of years is typically when you have this level of uncertainty, clients begin to pull back early because they're worried about the run rate, you know, post CR and into the future. We're not seeing that. We're actually seeing our clients be very focused on mission, very focused on investing in technology to bring to mission. And that is driving our growth today. Obviously, it's for the sake of Booz Allen, we want that to continue. But I think for the sake of the country, this is a good thing.

Got it. Okay.

Thanks. Thanks, Rossio. And Matt, just a quick follow up for you on the capital side of things. You mentioned your net leverage now two and a half times, and that's on a trailing basis. If we look at that chart that you highlight in the earnings presentation, you know, you've been pretty balanced in how you've been allocating capital over the last couple of years. We've been starting to hear indications the M&A market is maybe getting a little better in terms of where seller expectations are and clearly where interest rates are going. As you think about M&A perhaps becoming a larger share of that capital allocation strategy, can you just talk about, you know, what you would look for in M&A and what you're not doing today that would be of interest to grow into inorganically?

Yeah, thanks, Bert. First, our strategy is changing from a capital deployment M&A perspective. I think we've always been biased to M&A over a share repo, but the right M&A, right? That's strategic. And that really helps us fill our gap in a capability or a business model. We don't need to buy for scale. As Rossio mentioned, as the numbers indicate, we're growing 13 to 14 percent organically this year. We don't need scale. What we're looking for are unique and oftentimes niche capabilities or business models that will help us accelerate into some of these ways of technology or into areas where we think, for example, outcome based contracting may emerge. So I've heard the same commentary, Bert. I think we are seeing indications that more assets and potentially assets of scale will come to market. My leading indicator is always how many bankers are asking me to lunch. And my dance card is full, particularly from New York bankers, which typically indicate that more assets of scale are coming to market. I'm not sure that we're seeing yet enough data points to call it that prices have come down, but I certainly hope they will.

Thank you both. Appreciate

it.

Thank you. One moment for our next question, please. And it comes from the line of Mariana Perez Mora with Bank of America. Please proceed.

Good morning, everyone.

My first

question is about China. So you mentioned your PPR remarks, all these like defense pockets on China and the mission and the role that Buzaling could play there. What are the opportunities around JATC2? Because you recently announced this collaboration with LHX, like how you can play with the primes, how you can play directly with the government and how large that opportunity could be.

It's a great question. JATC2 is a key strategic initiative to bring together all the information that a COCOM commander would need to operationalize. And it's therefore an important deterrent to aggression. So we're very committed to it. We're a significant part of it. We work closely with the CDAO on a number of initiatives that feed into JATC2 and into other efforts that ultimately may or may not integrate together into it, but are all part and parcel of the same thing, which is how do you create full domain assets? How do you create a decision cycle that takes advantage of all of the data available and that accelerates inside of a potential adversary's decision cycle? That is something that Buzaling is very good at. Our understanding of the mission, our ecosystem of partners that bring technology at scale. And that the at scale part is the crucial part here. And frankly, our ability to co-create with them and to build pipelines of solutions are a big part of it. And this is really what Volt has been all about, doing that fast, doing that at scale and bringing the right technology. And that's what we're focused on.

Great. Thanks so much for the call. And my follow up question is about headcount. So we see all these great increases in headcount and the client staffing. But I'm curious if you could discuss a little bit about the clearances, how they are performing. And also post pandemic, you are able to be really flexible and really, I don't know, agile to adapt to these remote working. And how are the customer appetite to these remote working solutions as we go back to business as normal in the post pandemic world?

Yeah, Mariana, it's Matt, I'll take it. I don't think we're seeing any material improvements in the processing of clearances. It may be on the margins in certain areas, but nothing that is material from a firm wide perspective. To your second question, we have tried to, and our clients, take advantage of a lot of the lessons learned through COVID about remote work, about flexibility, about the opportunities to combine and recombine how people interact and engage in different ways. We learned a lot, for example, about remote hiring and how to make our hiring process more efficiently through COVID. And that has absolutely carried forward through to today. So we are seeing that our clients are more receptive to alternate work arrangements. We really pride ourselves on our flexibility. And as Rossio said, undoubtedly the labor market has gotten a little looser in the last 12 to 18 months. That's been helpful. But our performance really is intentional. And we talk a lot about remarkable consistency in the business. It has been particularly true on the labor side or on the supply side. Our attrition is down meaningfully, employee satisfaction is up, which we care a lot about. Our average monthly applications are on pace to double year over year. And a lot of that is technology enabled. And we've seen an almost 60% increase in referrals, employee referrals over the last three years. And I think that's in many ways the best indication of our employee value proposition and the fact that our employees are willing and eager to recommend us as a place to work and employer of choice to their network. So the short answer to your question is yes. The longer answer is it requires a lot of work and it's been very intentional.

Perfect. Thanks so much. Thank you. One moment for our next question. And it comes from the line of Kai Von Rumor. With Kowin, please proceed.

Yes, thanks so much. So great quarter. You talked about, I mean, Intel was down not unexpectedly with FocusFox, but you talk about that looking good. Give us some color on what you see, where you see it going from here. Have we passed the bottom? And secondly, you didn't talk much about global commercial. And this is the first quarter. It wasn't basically flattened down sequentially. It had a nice uptick. So we're seeing something of a turn there.

You know, I'll start with global commercial for a moment and then spend more time on national security. That's OK, Kai. You know, global commercial business is really a small part of the portfolio. The numbers this quarter still reflect the vestiges and softness in the commercial consulting side of the market, which I think is echoed by everything we see what's happening in the consulting industry in general. At this point, the our incident response business there is has accelerated. It's doing really great. And it's an important part of the offering. But what we really like about commercial is its connectivity to the rest of our business. If you think about our national cyber platform adversaries look at the entire attack surface of the United States, and they don't care if it's private or public or at the intersection. And so having in this presence, the cuts across makes us a valuable partner to our government clients as we support them here. But again, it's a small part of the portfolio on the national security front. You explained already why the numbers are what they are this quarter. What we're seeing into the future is a business that has repositioned against the true technology side of of of intelligence. There's a lot more AI space is growing as a significant part. Of our business, our clients now look to us to create unique solutions in and and they trust us to help them scale those solutions. That's we've spoken before, and Matt just talked about that business always is a little bit rate limited by the speed at which we can clear people or transfer clearances if they already have them. But even with that, we anticipate the growth and accelerating and building. There's a they want some really interesting work. They have some great pipeline and the talent is staying, including some of the cyber talent that we talked about in the past, is staying at Booz Allen and getting really fluid and redistributed against some of these key mission priorities.

Terrific. And a second one, you know, the whole industry has benefited from a much looser labor environment. But you talked about that you're doing much better than you ever have in terms of taking people from higher to putting them onto the mission. Maybe give us some color in terms of what you're doing there to get that improvement.

I'll start, I guess, Matt's also being close to this. I credit to this goes that this is all done under the leadership of Christine Martin Anderson, our CEO. And she assembled a team from all of our enterprise operations and the markets to work this problem together to maximum effect. We used to have, you know, first of all, the first thing we identified is that the time we were not taking people in full advantage of the people that were applying because we were too stove-fived in our approach. We have now built much more using both technology and process, much more cross-functional, cross-market view of this. So easiest way to explain it is the runner up for a position doesn't get lost in the system, becomes all of that knowledge positions that person for another similar opportunity. And again, that allows us to mine our incoming talent pipeline much more. Once we do that, we have gotten a lot better at shortening the cycle from the time we want to extend an offer to the time a person can join. That has been a lot of small changes, but each one of those significant. So that has been shortened. And then we're really very focused both for our incoming talent and for existing talent about giving them full access to the opportunity set that exists right here right now. That helps attrition because people stay longer if they can change jobs if they want to. But it really helps our new folks. We used to have this rule of thumb that it took 60 days to get somebody fully billable once they came through the door. That created fictional billability issues when we were hiring significantly like we are now. We have shattered that expectation. I couldn't tell you what the actual number is today in terms of reaching full billability, but it is a fraction of what it used to be. And when you put all of that together, that drives employee satisfaction. It drives economics. It frankly allows us to recruit with a somewhat small, you know, to run this business at growth with a somewhat smaller bench. So it's all to the good and it's all intentional and then coupled with all the training that we're doing and all the things that we're doing to upskill people and to keep them here. I think that's why you're seeing what you're seeing. So it's not and I agree with you. The market is a little easier than it was 18 months ago, two years ago. But I do think that part of this is all of these changes that we've made have again allowed us to outperform the labor market.

And Kyle, I can just add a few things to what Rossio said. You know, we typically talk about supply and demand separately and that, you know, in the short one were more supply constrained. But obviously the two work in sync. So part of the reason that we're able to deploy people quickly on jobs is a lot of work out there. Right. Our quote, you know, our book to bill for the LTM is now over one point four times. So, you know, we have sold an awful lot of work. There's tremendous demand for employees both internally and our internal marketplace, as Rossio mentioned, and externally in the hiring marketplace. And that's why, as Rossio said, you know, our bench is actually at the lower end of what we've seen historically and why we are continuing to step on the gas from a talent acquisition standpoint. The other point I make is this remarkable consistency we've seen, not just over the last nine months, but really I think the last 18 from a labor standpoint has broken some of the historic norms and I think has tended to even out some of the peaks and values. And that's one of the major rallies we see in the organization. I mean, we are very consistently adding 150, 200 heads every month. And it just makes this it allows the system to work on a more regular basis.

Great answer. Thank you.

Thank you. And one moment for our last question. It comes from Matt Acres with Wells Fargo. Please proceed.

Hey, guys. Good morning. Thanks for the question. Follow up, I guess, one more on the hiring. Is there a headcount growth number baked into your long term 5 to 8% organic growth number and based on what you're seeing, do you think, I guess, into 2025, maybe we still come in ahead of that based on some of the strengths you've talked about?

Yeah, thanks, Matt. And actually tie this question together with a piece of what Sheila asked. We have said historically that for us to hit our growth targets, we aspire to have our LTM book to bill in the 1.2 to 1.3 range and our headcount in, let's say, the mid single digits. And obviously,

we're ahead of the

mark on both measures. Our LTM book to bill is 1.41 times and our annualized headcount growth is above 9% on the client staff. And if you look just over the first nine months, we're above 6%, which again is above the historic targets and above our expectations for this year. So we're not getting ahead of guidance. As Rassi has said, we're acutely aware of some of the political and macroeconomic uncertainty, but there's a lot of momentum in the business and we feel very comfortable with where we are.

Hey, Matt. I love the fact that we're getting all these questions about talent. I think this is the most important topic. And so I'll just maybe take us on a slight detour and I hope you don't mind. But, you know, there's a natural tendency to look at companies like ours as a collection of contracts. And I do think, and this call proves it, that misses a little bit of the point because what we are is really a collection of people, in fact, more than a collection, an intentional team, purposeful team of people who serve clients leveraging contracts. And so while the contracts are not important, it's really the strength of the talent base that we focus on to drive this business forward. And I think that has served us well and will continue to.

Thanks. That's great call, Larry. And I guess one more for Matt on cash taxes. Why did the section 174 impact go up? And also, I think there's a bill going through to try to repeal that. Is there a way to think about how much you guys could get back if that happens? Is it kind of 200 million that potentially you could get?

Yeah, thanks, Matt. Three things happened this quarter with taxes, two of which are pretty straightforward and one of which is a little more complex. So why don't I go through them in turn and doing so? I'll answer your explicit question. First, we saw about 11 million dollar benefit related to a foreign tax credit. Once we follow 23 tax returns, this is largely what drove us to reduce our full your ADEPT tax rate to 22 to 23 percent. Now, second, getting to 174, two things happened. We increased our estimated 24 cash taxes related to 174 by about 125 million dollars from 100 million to 125 million dollars. And that's really because we completed a thorough contract by contract analysis of the 174 impact. And we baked that 25 million dollars into our our cash guidance. And then lastly, based both on the contract review as well as the increased clarity from the IRS that we all received on the scope of 174, we reversed on a certain tax position that we began recording last Q4. And there was a knock on effect to that tax position where we had increased our gap tax. We decreased our gap tax provision beginning in Q4 last year. We actually reversed that this quarter. We adjusted both of those out to provide a better view of what our state state tax rate would be. So that's the explicit reason we did a contract by contract review. Take a step back. It's just it's typically the size of our growth rate and we're investing consistent with that growth is what drove our 174 tax tax expectations up for for this year. With respect to what's happening on the Hill, we're obviously tracking it. You know, over time, you'd expect it to be completely reversed. Does it come in the form of a refund or credits? I don't think we know at this stage how whether it will happen and if so, how would it be implemented. But ultimately, we would get all that cash back and that would be used to further our capital deployment objectives.

Just to make one quick point, as we close off and I said this, but I just want to double click on it because this 174 topic is complex, to say the least. I just want to make it clear the outperformance that we had this year was almost entirely driven by exceptional top line performance, exceptional margin performance and really good cost management that has delivered the results that you're seeing through the first nine months.

Thank you both.

Thank you. And this concludes the Q&A answer period. I will turn back to Horacio Rosansky for final comments.

Thank you, Carmen. Thank you all for your questions and for joining us this morning. Before we close, allow me to take a moment to publicly express my deepest gratitude to each and every one of our incredible colleagues. The collective efforts of the nearly 34,000 people of Booz Allen produce the exceptional results that Matt and I have the privilege of discussing with you today. We're very proud of you, Booz Allen. We thank you for the passion and the commitment that you bring every day and for the world changing work that you do. And on that note, thank you again for joining us this morning and have a great day.

And with that, thank you all for joining. You may now disconnect.