Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's earnings call covering Third Quarter Results for Fiscal Year 2020. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for question.I'd now like to turn the call over to Mr. Nick Veasey.

Thank you. Good morning and thank you for joining us for Booz Allen's third quarter 2020 earnings announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We've also provided presentation slides on our website and are now on slide two.I'm Nick Veasey, Vice President of Investor Relations. And with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President Chief Financial Officer and Treasurer.As shown on the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and, therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our company's services and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our third quarter of fiscal 2020 earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligations to update or revise the information discussed on this call.During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our third quarter of fiscal year 2020 slides.It is now my pleasure to turn the call over to our CEO, Horacio Rozanski. We are now on slide five.

Thank you, Nick, and good morning, everyone. Lloyd and I are very pleased to share our latest quarterly results today. As you saw in our earnings release, Booz Allen's momentum continues. Our business leaders are looking to finish the fiscal year strong and we continue to deliver the financial performance laid out in our investment thesis.At the center of our thesis is the expectation that our firm can achieve 66% growth in adjusted diluted earnings per share over a three-year period, from fiscal year 2018 to fiscal year 2021. This increase would be driven by a differentiated market position that produces industry-leading revenue growth, an increase in profit margin and strong cash generation that supports a value-maximizing capital deployment strategy.It is gratifying to see that our plans and expectations are coming to fruition, thanks to both the operational performance and the financial stewardship of our talented team. Because of their efforts, today we are pleased to announce another increase in our revenue and ADEPS guidance for the fiscal year, an improved outlook for operating cash and another increase in our quarterly dividend.Today, we will discuss the full details of our third quarter in the context of the full year and how fiscal year 2020 is shaping up to support the three-year goals of our investment thesis and given that this is the first earnings call of calendar year 2020, I also want to take a moment at the outset to reflect on our firm's transformation.When we launched our growth strategy eight years ago, we called it Vision 2020, but we never meant to suggest that Booz Allen's evolution would end in 2020. This strategy was about setting a bold vision for the future and then relentlessly executing against it and that is exactly what we have done.We have moved closer…

Thanks, Horacio, and good morning, everyone. I'm excited to take you through yet another fantastic quarter of performance. At the beginning of the fiscal year, we told you that we would be executing a front-loaded plan for the full year. To ensure that, we delivered another strong performance even if there had been budget disruptions.Our leaders have executed extremely well against this plan and we carried strong momentum into the second half. Our performance through December gives us the confidence to increase our full year ADEPS revenue and operating cash flow guidance for the fiscal year and looking beyond this fiscal year, reinforces our view that we will achieve the multiyear financial goals of our investment thesis.Let's go through the numbers. Please turn to Slide 6. Starting at the topline, revenue and revenue excluding billable expenses grew by 11.2% and 8.3% respectively compared to the third quarter last year. The increases were primarily due to delivery on sustained client demand and our continued ability to successfully hire and retain talent.Year-over-year, we delivered nearly 18% revenue growth in Defense, our largest market. Civil also delivered strong results including revenue growth of 9% compared to the prior year period.As Horacio mentioned, our intelligence business remained somewhat constrained by the challenge of finding highly cleared talent. Its revenue expanded 1% compared to the prior year period. Collectively, our portfolio of businesses is well-positioned to continue delivering industry-leading organic growth as we have done so far this fiscal year.Please turn to Slide 7. Book-to-bill for the quarter was in line with historical performance at 0.48 times and our trailing 12-month figure is 1.21 times. Going forward, we expect a slight increase in volatility in our quarterly backlog as Vision 2020 continues to enable the pursuit of larger, more complex solutions-focused work in addition to…

Thanks. Daniel, please open the lines.

[Operator Instructions] Our first question comes from Sheila Kahyaoglu with Jefferies. Your line is now open.

Thank you. Good morning, Horacio, Lloyd and Nick. So good results.

Good morning, Sheila.

Horacio, a question for you. The team has executed on Vision 2020 as you said in your prepared remarks in a pretty difficult defense backdrop to start the strategy. How do you think about the changing needs of the customer over the next 10 years? With a more positive budget outlook, how do we kind of think about how Booz evolves over the longer term?

That's a great question to get us started. Thank you, Sheila. First of all, I need to start with a shout-out to the team. The work that was done from really 2012 to now to transform the firm and position us as the leading tech translator for the federal government has really been outstanding and it's really their success that Lloyd and I are here representing. When you look at our business, the numbers that we report this quarter that we report for this year the increased guidance, all shows that our strategy is working that this positioning as the leading technology insertion company, it has a lot of momentum in it.Everything we see -- every sign we see points to the fact that both from a readiness and a modernization standpoint the trends around technology are going to continue. And Booz Allen doesn't stand still. We appreciate the fact that the 2020s are not going to be like the 2010s. Great power competition is something we've talked about in the past. The digital transformation of the federal government is something we talked about in the past. Those are the waves that we believe we need to be in front of and continue to invest ahead of to make sure that over the next 10 years, we are anticipating the market not just reacting to it and we're shaping the market that we operate in.As I said in the prepared remarks, we're doing some work around trying to specify that a little more. But in general terms, we aim to stay ahead of the curve. We aim to continue to be a driver in mission innovation for our clients and we hope to then as a result create this kind of financial results that we've been seeing.

Yes. Thank you. And maybe as a follow-up to that solid financial results, revenue up 11%, up 8% ex billables but operating profit was less than that with a 6% increase. Can you maybe discuss puts and takes on operating leverage given the business model coupled with maybe hiring needs and investments you need to make in the business?

I'll start Sheila. Our operating leverage has remained pretty consistent to what it's been in the past. And as we continue to onboard the talent that we need for the – to meet the demand of our clients, we're doing success – being successful at that. So we expect it to remain the same going forward and feel pretty good about where we are.

Thank you. Our next question comes from Carter Copeland with Melius Research. Your line is now open.

Hey, good morning, gentlemen.

Good morning, Carter.

Just Horacio, I wondered if you might expand a little bit, the prepared remarks around this concept of technology insertion and that being a theme. Although, there's clearly a need there, the customer has been somewhat stodgy and slow to move to insert technology.So as you think about, how you change what you do or help the customer change what they do, is there a difference you see evolving in your business model in terms of how you invest or how you interact with the customer to really enact that change? I just – I wondered if you could expand on that for us.

Sure. We've been talking over the last few quarters about the fact that with more budget stability our clients who have a pent-up need to insert new technology have actually had the opportunity to begin to do so. I'm sure a lot of people on the call either attended or watched the panels at the Reagan defense forum last December for example.What struck me about the more than a dozen panels that included all of the key decision-makers in DOD, key policymakers all of the serious industry players, all gathered together and when you listen to the speeches on the panels, the one consistent theme was importance of technology as really a way to leapfrog this great power competition and we're seeing that in our business.If you get inside our revenue growth what has me excited is – the numbers are great. I don't dispute that. But more important is what's inside those numbers. And our work is totally aligned to this notion already of being the tech translator.So for example, we just launched a program where we're modernizing GPS systems across the Air Force and the Navy. We're using virtual reality for advanced training for the Army. We have many AI programs not just in Defense from the J-2, the operating units but more broadly in places like the FDA and almost too many to mention cyber programs that are mission-oriented, where we're protecting platforms not just networks.We believe that is an accelerating trend. We believe our clients are eager to continue to do that and they're relying on Booz Allen because over the last eight years we've built the innovation capabilities and the position to be able to do so. So I think that speaks to the sustainability of our market position. It speaks to why we continue to outpace the market and gain share and it probably also will speak to the resilience of our market position even with shifting budget scenarios into the future.

Great. Thanks. And just as a follow-up embedded within the head count growth, I wonder, if you might speak a little bit to what you're seeing in terms of attrition lately and if there's any – been any change on that?

Carter, we said at the beginning of the year that we expected to grow our workforce by 5%. We also said that, we were going to come out of the first half more aggressively than – given the uncertainty with the budget at the time, and we're tracking to that. So we were up, I think 6.5% in Q2, 5.3% this quarter. So we are performing exactly with what we expected and we're also seeing sort of normal patterns of attrition tied to that. We're not demand-constrained. And with the expected head count growth that we're on track to deliver that has also contributed to us raising and tightening our guidance.

Thank you. Our next question comes from Joseph DeNardi with Stifel. Your line is now open,

Hey, guys. Good morning. Horacio can you talk a little bit more about the…

Good morning.

Yeah. Good morning. The head count challenges within the intel side of the business? Has that been getting kind of better or worse of late? And what are the strategies to address that? Thank you.

Sure. Let me give a little bit of context, because I think this is an answer that ultimately has to wrap around more than just intel. I mean, if you look at our business as you saw defense and civil are actually ahead of our expectations for the year. Intel is a little bit behind our internal expectations. And when you deep dive into intel the dynamic is that early in the year as we reported, we lost a couple of re-competes. And so to get back to where we want it to be we actually have to hire ahead of our internal plan in order to get caught up for this fiscal year and take advantage of the demand that we actually believe is there. We actually hired at our planned rate. We did not get above it. And we're very focused right now on accelerating our recruiting efforts.We've already made some changes to the approach. There is more to come and we're going to be working that really hard. I want to come back out to the entirety of the portfolio, because it's instructive to look at one part of the business and it's important, but I think it's important to also not lose the forest for the trees in that we do not run our business as divisions or silos. We run it as interlocking pieces. And so in this particular case, the implication or the demonstration of that is that some of the talent that was in our intel business earlier in the year was actually redeployed to other parts of the business because of the clearances and the skills that they have. And that's actually helped fuel the growth that we've seen in other parts of the business, which then when you put it all together takes us to – and Lloyd keep me honest. I think this is the first time in a while where our entire revenue guidance range for the year is in the double digits.

Correct.

So, it's really important to look at the totality of the portfolio because one of the things that we has always been really good at is managing our talent base really on a portfolio basis.

That's helpful. And then Lloyd over the past couple of years, I think investors have had confidence in your ability to sustain the organic growth, because of how strong the book-to-bill is. You talked a little bit about that. But it's not as strong as it was. Are there any major factors to kind of point out in terms of protests or just larger opportunities getting delayed a little bit that's affecting that? Thanks.

Sure. Joe, we don't see ourselves as demand-constrained at all, in fact, looking at our Q3 record backlog up 7.4% to $22 billion. And the 0.48 book-to-bill for this quarter is in line with where we were last year. We're certainly seeing a little bit more volatility quarter-to-quarter given that as we said in our prepared remarks, we're pursuing larger more technically complex awards. But the team is doing great and we're winning on those pursuits as well. So to Horacio's opening comments, the fact that we've raised and tightened guidance, we see our backlog supporting that.

Thank you. Our next question comes from Cai von Rumohr with Cowen & Company. Your line is now open.

Yes. Thank you very much. So, Horacio, you mentioned again the key drivers to your market being great power competition and digital transformation. That being the case, I would think that Intel would be among the highest priorities of your target market. Is that the case and if not, why not?

I don't know that there is a highest priority. I think when you look across the portfolio there's real opportunity in all elements of it. We clearly see opportunities in Intel. We see the demand there. And as we've talked before, there are some constraints about the level of clearances required to work in that market but lots of opportunity.But if you shift to some of the other things I was talking about before, huge opportunities in Defense and tremendous need both in terms of great power competition and even some of the most recent political turmoil that speaks to the need of having the right technology to address those trends.And then in our civilian portfolio, everywhere from the VA to the FDA to the IRS, the need for new technology, the need to modernize -- this is a target-rich environment for technology insertion for technology translation across the federal government and we're on it.

Great. And the other thing you mentioned was that you are focusing on going after larger more complex programs. Historically, your strength has been that you're on so many IDIQs and you've basically been able to win business in smaller bites with greater speed than some of your competitors. How does the move to kind of chasing bigger elephants really kind of fit with where historically your strength has been?

We're actually not moving to chasing bigger elephants to use your words. What we're doing -- the core of this business is still very vibrant around these midsize programs that are continuing to grow rapidly, that create tremendous value for the clients and that have all of the economic benefit that we've always liked.I think that the other reality is as you get closer to the center of the clients' mission, you do technically more complex work. Some of it is competed in this larger contracts and we have become quite good at going after them and capturing billion-dollar programs.But this is an add-on to create balance in the portfolio. It's not a replacement for what we're doing and that's why you're seeing the growth that you're seeing.

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

Hey, good morning, everyone.

Good morning.

I wanted to follow-up on Carter's question earlier just when you're talking about the emphasis on technology and kind of the shift to software defined. I'm curious if you see any bigger opportunity to participate in what have traditionally been hardware programs or platforms whether that be something like a B-21 or GBSD whether that be in partnership or even competition with traditional hardware products?

We actually are already in many of these programs and have been for years. And what's happening is -- our goal is -- seems to be evolving inside those programs to delivering some of these more technically oriented work whereas before, we might have been more on the program management side.So -- and I see that trend continuing and intensifying. As again a lot of the value moves from hardware to software, things like open architectures become of greater interest to the government.Cybersecurity of these platforms becomes a more important element that the government is investing in. So, we see opportunity in continuing to participate and in fact scaling our presence in some of these programs.

Got it. And then on working capital, I mean even after you raised free cash guidance here I think it still implies around 90% conversion on net income. So, it looks like that still has a pretty big working capital drag in it this year.And correct me if any of those metrics seem wrong, but if revenue growth stabilizes as opposed to the acceleration you've had over the past few years, does that mean a bit of a lessening working cap drag? And do you see better free cash conversion going forward as a result? Thanks.

Yes. I mean we don't see it that way. I mean with the strong balance sheet that we have the fact that now we're raising our guidance around operating cash, we feel we've got the ample capacity to meet our operating needs as well as our capital deployment needs.

Thank you. Our next question comes from Jon Raviv with Citi. Your line is now open.

Hey, thanks. Good morning everyone. I'm going to try Gavin's question a little bit different way. With the blurring of lines seemingly between hardware and software if you will and plus the customer always talking about software, software and technology as you mentioned Horacio at Reagan. To what extent do you sense that maybe some of the hardware companies are feeling like they may be left out and maybe they're investing or trying to hire or trying to acquire assets in this space to almost perhaps catch up in a certain respect?

I'll let them talk about their businesses. I think what I can tell you from our perspective is we see growing opportunity. Again as -- there's no doubt that there's -- the digital part of these value chains is growing in both value opportunity and probably profitability. And that's why we've been so interested in driving that into our traditional business and doing the kinds of programs that I described before. And that's frankly also why our option value opportunities are as interesting as they are because we believe there's a theme there of work that is actually going to continue to grow continue to add value. Things like Modzy are new needs in the market that nobody is addressing but us. And so I think there's really -- this is what is I think going to fuel our potential opportunity going forward.

Appreciate that. And you set me up for my follow-up. On the option value, I know it's hard to answer sometimes, but how much of the uplift we're seeing this year, is from option value, or do you think there's still a lot of prime growth in things like Modzy and District Defend and Rec.gov? Thank you.

Yes. I'll start Jon. Those initiatives bridge us back to the main business as well, certainly what we're doing with Modzy off of that application to -- back into what we're doing in our intel and defense businesses. Still too early for us to parse the degree to which, but certainly our business leaders see merit as well as the potential for these initiatives as it relates to the main of the business. We look at it on a portfolio basis. And as that portfolio continues to grow and strengthen, we'll have more to say about that.

Thank you. Our next question comes from Matt Akers with Barclays. Your line is now open.

Hey, good morning guys. Thanks for the question. I wanted to touch briefly on the intel headwinds that you mentioned earlier, I guess some of these recompetes. Are those mostly behind us, or is there anything big to kind of watch out for in the future? And then on the head count side, we see all these headlines of the security clearance backlog running down. Does that maybe help you grow faster going forward, or is it more just a matter of kind of finding the right talent?

On the first part of your question, our win rates continue to be very strong. Sadly, we don't win 100% of everything, but I actually think there's goodness in that, in that we're occasionally leaning forward into work that would be hard for us to get and we're still getting some of it. I think that's what drives growth and opportunity and I'm proud of the team for taking swings up some of those things. On the clearance reform thing, we've been part of the conversation with policymakers and with clients on this topic and we are glad to see that progress is being made at the macro level.At our level, it's still too early to see any real movement. There's a marginal improvement to some of the times for clearance crossovers and things like that, but on the whole and on the main, we still haven't seen an easing of that supply. But as I said before, the key for us is ultimately going to be we're revamping the way we recruit into those markets and we're still growing our head count at the anticipated 5% for the year. So we're feeling pretty good.

Okay. Thanks. And then I guess if I could just briefly on margins. EBITDA margin I thought looked decent in the quarter given that second half for you guys is typically a little bit weaker. But then I think your guidance implies a pretty big kind of sequential decline in the fourth quarter, if you could just kind of talk about the dynamics there between third and fourth quarter?

Sure. At the top though, we're pleased with our margin performance for this quarter and it's very much in line with our expectations of low 10s through FY 2021. On top of that, you also see us being able to sustain it. We're operating extremely well at the contract level. It's broad-based.We've got systemic improvements in our contract life cycle from pricing, as well as to delivery. So from our perspective, it's certainly working, closer to clients' mission, more technical content of the work, our execution and so forth. There is a typical seasonal pattern to our margin performance, but as we have forecasted the year, we expect to be in the low 10s and we're on track to do that.

Thank you. Our next question comes from Seth Seifman with JPMorgan. Your line is now open.

Thanks very much and good morning.

Good morning.

Horacio, just to ask another question about intelligence. Just as we think about the outlook and we think about the actions that you guys are taking there to win more, is it kind of a matter of anniversarying some of these recompete losses and so, we should look for acceleration in growth there, maybe in the back half of next year?

It's too soon to put a time line on things. Like I said before, we see ample demand. Our win rates overall are consistent with historical. Our hiring is consistent with historical and we need to accelerate it beyond that and we're on it. So stay tuned. We're going to work this as hard as we can and as fast as we can and we'll share more when we know more.

That's fine. Thanks. And just finally, right on the mix in the quarter with the high billables, was that kind of attributable to one thing? And what are the implications there going forward? I think, as a percentage of sales, it was fairly high. Is that just a timing issue in this quarter and it kind of reverts, or is…

Sure. We forecasted billable -- I'm sorry, we had forecasted billable expenses to be between 29% and 31% for the year and it's a little bit elevated from that, largely driven to subcontractor requirement in our defense business -- part of the business as well as ODCs related to that, given the strong performance in defense expected on our part, but a little bit elevated outside of the range we originally forecasted.

Thank you. Our next question comes from Robert Spingarn with Credit Suisse. Your line is now open.

Hey. Good morning.

Hi, Robert.

A couple of things. Just, Lloyd, Horacio had mentioned that the commercial business was flat so far year-to-date, but I think you've also said that's one of the key drivers for EBITDA margin upside. And so I want to just reconcile this idea that that's going to improve, but the margin maybe contracts in the fourth quarter based on the comments a moment ago. So how do we think about that? And if commercial doesn't start to accelerate what are the long-term implications for EBITDA margin there if at all?

Sure. Well, I think, the first way to pick this up is, not only that we're pleased with our margin performance that we're tracking to the low 10s for the year, but you'll also notice that there's an increase in our cost-plus portion of the portfolio, which is offset by our strong execution on the fixed price and time and material work.In addition to that, our continued sale of the more technically focused work comes with a higher margin that's also contributed to that. As we have pointed out in our previous calls regarding commercial, after four years of mid-20s to low 30% growth, we are expecting -- and it's still growing this year, we're expecting for us to return to a stronger growth profile in the future. Once that happens, that will, from our perspective, contribute or be accretive to what I just said regarding our strong operating performance, with the federal side of the business.

Okay. And then, maybe this is related to part of what you just said on the technology side. But the cost of goods sold were the opposite of billables in the quarter. They were very low. Is that a function of the high billables in the revenues, or is there something else there?

No. We think its part of the high billables.

Thank you. And our next question comes from Edward Caso with Wells Fargo. Your line is now open.

Good morning. Congrats. I had a question around the pace of award activity. The company historically is very sensitive to the September government fourth quarter. With the presidential election cycle coming up, can you look back in your history? Is there going to be more challenges for Booz Allen to hit that spike number in this September quarter? Thanks.

It's too soon to start to talk about guidance for next year or any of that so I'll refrain from that. Generally speaking, we don't see the outcome of elections until well after the election in our business. The bigger challenge to your question over the last few years has been the pace at which the budget gets settled and approved. And since there's a two-year budget deal there's -- we'll have to wait and see.In the meantime, as Lloyd and I have both said, there's ample demand for our services. We're bringing on talent strongly. And we at least for the -- as far as our crystal ball goes we expect that to continue.

My other question is around duration of awards. Just curious if across the portfolio the duration is getting longer. And is that helping your bid and proposal dollars stretch further?

Yes. I think is the short form of the answer is the -- if you remember a few years back, parts of the government decided to try and limit things to three years. I think that that was not a good move for the government and it certainly didn't help industry.I think we're back to the more normal historical time lines. And so we've seen length of awards to prime up to sort of historical averages. We're happy to see that and hopefully that will be stable and continue.

Thank you. Our next question comes from Tobey Sommer with SunTrust. Your line is now open.

Thanks. I kind of wanted to pull the aperture back. And as you look at what your next set of long-term financial goals might be, how do you think about kind of peak budget spending growth at least from a headline perspective versus funding that may be more applicable to the company? Thanks.

Sure. As we have said at the onset of our investment thesis, we expect to be in that 6% to 9% top line growth low 10s in terms of margin and 66% increase in ADEPS. Given the uncertainty with the budget going forward to the best of our abilities, we try to take that into account. So I'm hesitant to look beyond the horizon of our investment thesis.We have work currently underway where we are evaluating our strategy. We will take that into account. But also keep in mind, the firm has performed well in certain and uncertain budget environments in the past and we expect to do so going forward.

As a follow-up, I was wondering if you could just give a little bit more color around what your plans are to accelerate growth in the commercial area.

We have a business as Lloyd pointed out before that was growing at this very strong double digits. We have a -- it's small business. It's 3% of our overall portfolio and it's less mature than the rest of the portfolio, so it will experience more volatility with few contracts that wound down.But we expect that business to continue its expansion into the future. We're optimistic about what we're seeing there already and we're looking at where do we go next as part of the overall strategic review.

Thank you. [Operator Instructions] Our next question comes from Ronald Epstein with Bank of America. Your line is now open.

Hi, guys. This is Caitlin on for Ron. According to your 10-Q, it looks like you recognized a bad debt reversal of about $9.2 million in the quarter. Can you discuss the impact this had on earnings?

It's a normal part of our operations our financing. It hasn't had a material impact to the bottom line.

Okay. Thank you. And then can you discuss the pipeline of upcoming recompete contracts and new business opportunities? Anything specific that we should be watching out for?

No. It's -- the team is doing very well in shaping future opportunities. We don't see anything different than sort of the normal point of where we are in our fiscal year. And given our raise in guidance we remain optimistic of having a strong FY 2020.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Horacio Rozanski for any closing remarks.

Thank you everyone for your questions. Lloyd and I look forward to a strong finish to the year, and we're very proud of what the firm has accomplished.One more time I want to do a shout-out to the entire team for an exceptional job. They're working as hard as ever to continue Booz Allen's evolution and to sustain our growth by delivering unmatched value to our clients. Again, thank you for taking the time to be with us this morning and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.