Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's Earnings Call First Quarter Fiscal Year 2023 Results. . I'd now like to turn the call over to Mr. Nathan Rutledge.

Thanks, operator. Good morning, and thank you for joining us for Booz Allen's first quarter fiscal year 2023 earnings call. First, I'd like to introduce myself. I'm Nathan Rutledge, the new Director and Head of Investor Relations for Booz Allen. I'm excited to be here and for the opportunity to serve you. I look forward to working with you all. We hope you had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. With me today to talk about our business and the financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President and Chief Financial Officer. As shown on the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning 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 filings with the SEC 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 of our non-GAAP measures to the most comparable GAAP measures in our first quarter fiscal year 2023 earnings release and slides. It is now my pleasure to turn the call over to our CEO and President, Horacio Rozanski. We are on Slide 4.

Thank you, Nathan, and welcome to the team. And good morning, everyone. Thank you for joining the call. This morning, Lloyd and I are happy to share strong results for the first quarter of fiscal year 2023. During our May earnings call, we said the pattern of growth for this fiscal year would be predicated on growing momentum in the first half to mitigate the likelihood of uncertainties in the second half. Our first quarter results demonstrate that we are building the strategic momentum and operational resilience required to meet our expectations for this fiscal year and achieve our multiyear financial objectives. Revenue growth for this quarter was excellent, and we grew across all markets. The bottom line was consistent with our plans for the year. In short, we are on track both towards this year's guidance and towards our multiyear goal of growing adjusted EBITDA to $1.2 billion to $1.3 billion by fiscal year 2025. Lloyd will walk you through the quarter's results and our full year outlook in depth. But before we go on, I'd like to pause a moment to share some upcoming leadership changes. After 20 years with Booz Allen, Karen Dahut, President of our Global Defense sector is retiring effective October 31. Karen has had an impressive career at Booz Allen to include the initial standup of our Strategic Innovation Group, leadership of our civil and commercial businesses and for the past 5 years, heading up our largest business sector. Karen's leadership and creativity have had a tremendous impact on our firm and our clients. We are grateful for all her contributions and we wish her well. I am very excited to announce that Executive Vice President, Judi Dotson, currently, the Head of our National Security sector, will transition to the role of President of…

Thank you, Horacio, and good morning, everyone. Our first quarter performance reflects our focus on growing the business profitably as we seek to grow adjusted EBITDA dollars by approximately 50% through fiscal year 2025. These results were supported by a top line that exceeded our expectations as we deliver on our goal to achieve industry-leading organic revenue growth. Our disciplined strategy across the business drove robust margins while we continue to optimize our balance sheet and create capital deployment opportunities that will deliver meaningful value to our shareholders. Importantly, our approach is working, and we remain confident in our ability to continue delivering exceptional operational and financial performance, which keeps us on track to execute against our long-term financial objectives. Let's now turn to our first quarter results on Slide 6. At the top line, total revenue increased 13.1% for the first quarter to $2.2 billion. Organic revenue grew approximately 8% to $2.1 billion, with approximately $103 million of inorganic contributions. Revenue excluding billable expenses also grew 9.9% year-over-year to $1.6 billion. These results highlight our ability to convert sustained demand for our services and solutions by efficiently hiring and deploying our growing talent base. And as expected, our billable expense mix is normalizing towards the midpoint of our 29% to 31% target range, which was primarily due to an increase in materials purchases this quarter. At the market level, we are pleased with the momentum and growth across all of our markets. We believe that -- expertise and leading-edge capabilities will continue to support durability of demand and provides visibility into future growth prospects as we continue to shape and execute the right type of work aligned to the hypergrowth areas we want to compete in. Revenue growth for the first quarter was led by our civil business, which…

Thanks, Lloyd. Operator, please open the line for questions.

. Our first question comes from Sheila Kahyaoglu with Jefferies

And congrats -- I want to ask a specific question actually just on the civil growth, given it was so robust, up 12%. How do you guys think about the drivers of that, whether it's catch-up in delayed procurements or new contracts, but you also mentioned some new health care wins. So maybe if you could talk about that and how Liberty has helped contribute to your increase in market share?

Sure. Why don't I start? As you said, well, we're very pleased with the growth of the entire portfolio in this quarter. It gives us the momentum and the operational resilience that we're looking for to navigate both this year and the multiyear financial envelope that we have created. And again, I mean, first quarter demonstrates both at the top and the bottom line that we are very much on track. All three markets grew in the quarter pretty robustly and health was the standout in civil, but the entire civil business is growing quite well. Health has been a very solid, close to double-digit grower organically for now quite some time. And the drivers there are unique position in some of these accounts in terms of helping them drive the digital transformation of those businesses, which positions us against procurements, I think, in a very unique way. And we continue to capture both share and share of mind really in the minds of our clients as they look to transform those organizations. But in addition to that, our -- what we call citizen services, which is everything around the Treasury IRS and that entire portfolio has now a very robust pipeline that is looking really good because, again, those agencies are looking for the same kinds of federal -- of digital transformation efforts that we are positioned against. And then lastly, we are focusing the third leg of our civil stool around really issues of domestic resilience and climate change that I think that are clearly beginning to get significant traction. So when you put it all together, going back to the notion of VoLT, we are focusing on the hypergrowth areas where we believe the greatest opportunities are going to be, and I think, again, first quarter demonstrates we're on track.

Sheila, this is Lloyd. The only thing I would add to your Liberty question, it really has been a strategic accelerator. As we said previously, that's our strategy when it comes to M&A. And financially, we saw $92 million from Liberty inorganically as a contribution. So it's really integrating well, and we're on pace to have a solid year.

Our next question comes from Noah Poponak with Goldman Sachs.

It's Gavin Parsons. Appreciate all the color on the hiring environment. I just wanted to ask for a little bit of an update there. It looks like you're well on track for the target of mid-single digits for the year. Are you seeing any impact of a less tight labor market in the tech industry? Can you talk a little bit more about just the traction, your initiatives you're having and how that's going?

Sure. Yes, as you point out, I think we're very much on track towards our targets there, and we are seeing really sequential almost month-over-month increasing momentum and increasing growth on our hiring. It continues to be a competitive labor market. We are getting in a lot of talent. We see pre-COVID levels of attrition. But overall, we're gaining ground because our value proposition continues to be very strong. The type of work we do, the way in which we do it and the suite of compensation and benefits that we offer our employees is very much competitive really everybody in the market, and differentiated really from most people in the market. In terms of color, I would point you to a couple of things that have me excited. One is we've seen in the last few months, the return of a few senior leaders. So we had lost two others that we didn't want to lose who now are coming back perhaps after seeing whether the grass is greener on the other side. And I think that speaks well to our value proposition and the sustainability of that proposition through market changes. And then the second thing that has me excited is our Chief Operating Officer, Kristine Martin Anderson, is driving an agenda that is really looking to improve the candidate experience but also shorten the cycle from when we need a person to when that person becomes billable. There's a number of things we can do to really get from need to revenue, if you will, faster, which is obviously good for us, but it's also good for the candidates. Nobody wants to start a job slowly. Everybody wants to hit the deck running. So I think all of that positions us well for the year and beyond.

Got it. I appreciate it. And then maybe just a clarification on cash taxes. It sounds like some of the -- the $200 million headwind this year could possibly reverse in the future. I mean, is your expectation that your go-forward cash tax rate will be 23% to 25%, and the headwind this year could reverse in future periods?

Yes, you got it right, Gavin. We're seeing between 23% and 25% going forward. And the $200 million associated with our strategic planning initiatives in prior years will come back to us. I can't tell you now exactly when it will come back to us, but it will, we expect, come back to us.

Our next question comes from Colin Canfield with Barclays.

Can you remind us on the margin drivers in the quarter? So a couple of moving pieces that we talked about at the Investor Day, call it, roughly 10.5%, mid-10% guide to that FY '25 target, but then we get 11.2% in the quarter. So maybe if you could talk about the level of investment that you saw in this quarter and how that kind of unfolds over a multiyear period?

Sure. Well, let's start with how happy I am with the fact that we're out of the gates with 11.2%. And it really is a reflection of continued solid contract performance. And quite frankly, as the business has opened up, we're seeing an -- spend and billable expense mix start to normalize in addition to that higher indirect spend. We are in the early stages of investment, particularly around cyber platform, as you heard in our prepared remarks and digital battle space. So at this point, investment really is I would characterize it as organizing our leadership, recruiting the right leaders, things of that sort. I think where that will put us over the course of the year is how I've guided, which is mid- to high 10s. So we will exceed some more investment over the course of the year. But the guidance range that I provided so far is what I would use going forward. And also just to close it out, it's also kind of back to our normalized pattern, where in the first half of the year, we do see higher margin performance. But in the second half of the year is where we typically invest in our people, infrastructure and technology.

I'll just add one quick point, which is that our North Star financially is EBITDA dollar growth. And we're looking at a year where we're trying to deliver $950 million to $1 billion and then accelerate in future years to get to the ultimate goal of $1.2 billion to $1.3 billion. And so as Lloyd points out, we are managing cost, we're managing the business and ultimately, we're keeping a close eye on margin. But ultimately, we want to grow EBITDA dollars, which really starts with organic revenue growth and everything else that we're doing.

Got it. And then maybe one more on capital allocation. But if you could talk about kind of the desire to get capital intensity within capital allocation. Obviously, kind of the cyclical headcount backdrop that we think about weaker commercial IT hiring help you guys, but at the same time, you can make the argument that we're entering a structurally impaired demographic environment. So then if we think about how that affects capital allocation, and especially kind of the headcount departure dynamics -- acquired names?

I'll start. I'm pleased with the fact that we feel we've got the right levers in terms of allocating capital, and for the benefit of our shareholders, the near, mid and long term. And with those levers, it gives us a great deal of flexibility to do that. This particular quarter, $58 million in repos, $59 million in quarterly dividend. And the fact that we've got a growing pipeline of strategic M&A opportunities really sets us up, I think, to deploy against what we've stated for the long-term objective. Obviously, when we look at some of the M&A opportunities, we have to take into account the talent base and the cultural integration. And that comes even way before sort of what the financial implications are. But that goes hand in hand with how we think about our M&A opportunities. And so far, so good. In the case of Liberty, we had a really good experience there, and we're looking to replicate future deals along those lines.

Our next question comes from Cai von Rumohr with Cowen.

And good quarter. So most of your peers are talking about the fact that bookings have been slow, but we have a very robust FY '22 budget. And so we're expecting a particularly strong seasonally fourth quarter of the fiscal year, this current quarter. Could you comment, do you agree with that? That's also normally your strongest quarter. And could you update us on the two large contracts that were protested, the $1.1 billion, I think, the NGA and the classified defense contract, that status?

Cai, it's Lloyd. I'll start. What we have historically seen is our traditional quarterly book-to-bill pattern really starting to change in light of these larger procurements that can be awarded at any point in our fiscal year. So when you look at our Q1 of 0.72x, that's really a result of not having one of these larger procurement hit, as you saw in our Q4 of last fiscal year. That being said, we internally look at the trailing 12 months of 1.21x as a better indicator as to the demand signal, and we're seeing strong demand signals, particularly with our backlog up 6.7% as well as continued growth in that regard. As to things shifting, with the exception of 1 or 2 contracts, we're not really seeing a lot of things shifting at this point in the year. And I would say that as we look towards next quarter, we're really seeing, as you point out, continuing to be a seasonally strong quarter for us, and we're already seeing larger awards being released, an uptick in RFPs and strong indications that our clients are going to move out before the end of the government fiscal year. As to the large protests, it's approximately $1.1 billion in total. As you know, we are in an environment that is heavily protested. We are optimistic that the things that are under protest will ultimately will prevail. But it's sort of an environment, as you know, where it's heavily protested.

And you mentioned EverWatch. DOJ, as you know, is challenging your proposed acquisition. I think they're asserting that if you bought EverWatch, you'd have a quasi-monopoly with an important customer. Could you comment, what is your response to that? And what is the status of that proposed acquisition?

Cai, why don't I take that one. Thank you for asking that question. I'll start by saying this is important. As part of VoLT, being VoLT is around velocity. And it is the notion that the right acquisitions accelerate our ability to bring the right capabilities to our clients in our environment where our clients need to move faster and need us to help them move faster. And so we look at acquisitions including EverWatch through that lens. And we do believe, and strongly stand by the statement that EverWatch is not -- if the consummating that acquisition will not just be good for Booz Allen, it would actually be good for our clients. For sort of a further reading, I would point you to -- we filed our answer last Friday to the DOJ claim and I'm not a lawyer, so I'm just going to let you read that answer. I think it's very well done and it stands for .

Our next question comes from Bert Subin with Stifel.

Horacio, just for you. You talked about cyber in the beginning in your prepared remarks, and most of your peers also talk about their own differentiation in cyber. What do you think Booz is doing differently here that's ultimately going to get you to that $1.2 billion to $1.3 billion in EBITDA target? I'm just wondering if you could highlight why you think you'll have an advantage on the cyber front.

Thank you for that question. I would characterize our position as one of first mover advantage. We have been working with the intelligence community on some of the toughest cyber challenges going on for decades. I can point you to Mike McConnell, who is former Director of Booz Allen in the mid-'90s. And since then, we've been building both the position, the capabilities and the workforce which now it's a few months old, but I think it was rated as the largest cyber workforce in North America, that we clearly both have the scale and the know-how. What our National Cyber platform allows us to do is take that very unique tradecraft and make it available in the correct ways more broadly across a set of missions that deeply require it. Certainly, as you know, in DoD, cyber is now 1 of 5 warfighter domains. And the ability to serve those missions with that unique tradecraft is going to serve us well. Also, and I think you've seen this in some of the releases because of our unique position, we tend to attract unique partners, both large and small, highly innovative companies that have tremendous new capabilities that, I think are going to be very significant to this fight. And then the last point I would make around cyber is because of both the breadth and the depth of our efforts, we're able to attract a unique workforce that once you come here, wants to be at Booz Allen and can serve again, not just against our traditional clients, but I talked in the prepared remarks about the Cypress contract at NASA and a number of other opportunities that are in the pipeline. But I think, again, position Booz Allen uniquely both in terms of breadth, scale and depth in a way that nobody else can do.

Just a follow-up to that. You mentioned five sort of dimensions of the battle space. Obviously, space itself has sort of come into the conversation more over the last couple of years. You've won some contracts with NASA. Can you talk about what's your sort of growth aspirations with Space Agency are?

They're significant. I think there's clearly an opportunity to use technology in a different way to transform our position in space. This is both around being able to aggregate data from all of these space collection systems and providing them to the war fighter in unique ways. That's a lot of what our digital battle space capability is about; work that we are already doing in space that can be transformed by some of the work that we're doing. And then really some of these intersections because we talk about five war fighting domains but they're not separate from each other. . So space and cyber, for example, to connect both of your questions are tightly linked. And we have a unique capacity and capability to bring those two perspectives together in a way that really will benefit both the Department of Defense and the nation.

Our next question comes from Matt Akers with Wells Fargo.

I wanted to follow up on Cai's point about EverWatch, and we've obviously seen kind of regulatory pressure around M&A. Curious how you see that kind of across the companies that you look at -- and sort of if that shapes sort of the shift toward a little bit more M&A that you've talked about?

Yes. I guess I'll reiterate, we feel that M&A for us is a strategic accelerator, is very much consistent with VoLT, and is a top capital deployment priority. So we expect to continue building the pipeline. And we expect to continue to be successful down that path. We have a strategy around VoLT that we are following. And I'll reiterate, I really do believe that the right acquisitions are both good for Booz Allen certainly, but also good for our clients and ultimately, increase competition.

Got it. I guess to clarify on the cash tax kind of the incremental $200 million. Is that something that they're still sort of tax planning efforts that maybe shift and possibly be better? Or is that $200 million kind of pretty solid at this point?

Yes, it's pretty solid at this point. We, over the years, our tax planning strategies really created some positive tailwinds. And the IRS is looking at our amended returns and we expect that it's going to come back to us. It's just a timing matter.

Our next question comes from Rocco Barbero with JPMorgan.

Are you guys able to provide an update on your visibility to the second half where there is a little more caution on the ?

Our guidance for the year, 5% to 9% really took into account a number of elements that have yet to play out. Certainly, when we come up on the midterm elections, that could have an impact. Certainly, the next COVID variant in terms of the productivity of our workforce, the geopolitical conflicts that are going on. So we've got a little bit more uncertainty in the back half, but how we've tried to capture that is having a little bit wider guidance range for the year, 5% to 9%. As we get -- approach the second half, we'll have a little bit, I hope, clarity as to where things are going to break. But again, to reiterate, Horacio's comment at the beginning, we're really building momentum certainly in this quarter. We're looking to do the same in the second quarter. And that will, we believe, help us sort of navigate the uncertainty in the back half of the year.

Our next question comes from Tobey Sommer with Truist.

Along the same lines of the back half of the fiscal year, what are you hearing and assuming for a budget in fiscal '23 out of the U.S. government? And does your guidance assume movement there or a continuing resolution?

I think our guidance assumes increased volatility, which ultimately says, we are not trying to predict exactly what will happen. I think a continuing resolution is quite possible in the current environment. We certainly saw that at the beginning of this year. And so as I mentioned in the prepared remarks, we are focused on what we can control. And what we can control is our ability to hire people and get them on contract as quickly as possible, our ability to continue to win the right kind of work that's consistent with VoLT, our desire to manage costs so that we can both invest and provide some resilience against the volatility, the inflationary pressures in the environment and ultimately continue to pursue strategic M&A. So when you put all of that together, I feel really good about the first quarter because it demonstrates that we're both building momentum and resilience against this year and the potential volatility in the second half, or more broadly against the time frame of our entire investment thesis and the fact that VoLT is working.

And I wanted to ask a follow-up on EverWatch. I want to get your sense for exactly how important this is, this dispute because it seems like the DOJ is sort of defining a contract as a market. And what the outcome of this and this sort of regulatory approach to mean to your ongoing strategy to be more active in terms of acquisitions?

I think as you probably know, we're talking about a relatively small contract that's at the center of all of this. Again, I would point you to the answer we filed last Friday as a sort of comprehensive view about our view of sort of what is the right way to proceed and why we believe acquisitions like EverWatch are both good for us and good for our clients. And so at this point, we continue to build the pipeline. We continue to prioritize strategic acquisitions. And we hope to prevail on this one, but this is our strategy, and it's really around increasing our velocity.

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

Thank you very much. Thank you all for your questions this morning and for joining us. Close on a bit of a personal reflection. Next week, I'll celebrate my 30th anniversary with Booz Allen, and it's a time of reflection when you think about what kept you here, a whole career where perhaps that wasn't the original intention when I joined in the early '90s. And I come back to -- there are many factors, but the central one for me has been the people of Booz Allen, the people have had an opportunity to work with. And on these earnings calls, Lloyd and I have the honor of representing the collective achievements of our colleagues. There's now over 29,000 people at Booz Allen, and they really are our greatest asset. And as you heard on this call, given the work that we do, many people think of them and I think of them as a national asset as well. And through some really volatile and trying times, our people have continued to persevere and they've shown unwavering commitment to our clients' missions, to our communities and personal to me, to each other. Their catalysts for change, their passion for doing good is inspirational and healing. And the impact of their work shows not only in the results we discussed today, but also in the lasting change they make our clients' missions and to our nation and even the world. Dr. Martin Luther King once said that only when it's dark enough can you see the stars. And in the current environment, these days, we are living in moments that are times can indeed feel very dark. And our people, our Booz Allen stars, if you will, are the guiding light for all of us. They're best proof points of our firm's fundamental strength and resilience because they live our purpose and values each and every day. So if you'll allow me today, I'd like to just close with a simple thank you. Thank you to the people Booz Allen for all you do each and every day and for what you've done for me over 30 years. And to those of you on this call, again, thank you for being here, and thank you for joining us. Have a great day and a great rest of the summer.

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