Good morning. Thank you for standing by, and welcome to the Booz Allen Hamilton's Earnings Call covering Third Quarter Fiscal Year 2023 Results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I'd now like to turn the call over to Mr. Nathan Rutledge.

Thanks, operator. Good morning, and thank you for joining us Thanks, operator. Good morning, and thank you for joining us for Booz Allen's third quarter fiscal year 2023 earnings call. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. With me today to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Matt Calderone, 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 third 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 now on Slide 4.

Thank you, Nathan, and good morning, everyone. Thank you for joining the call. Matt and I are very pleased to share exceptional results for the third quarter of fiscal year 2023. These results show Booz Allen is gaining momentum. We are positioned well for the remainder of this fiscal year, and on track to achieve our investment thesis. This quarter, we delivered industry-leading double-digit organic revenue growth. Our strong demand momentum and continued acceleration in hiring bolster our confidence as we look ahead. Given the strength of our performance, we are making positive adjustments to our guidance ranges, which Matt will discuss in a few minutes. Additionally, and as you may have seen, Standard & Poor's upgraded our credit rating to investment grade last week. This is a reflection of our strong track record of growth and our consistent financial performance. Today, Matt and I will discuss these results in the context of our investment thesis. I will also update you on the progress we are making on VoLT, focusing on how we continue to outpace the market through the Velocity dimension of our strategy. Let's begin with our investment thesis. At our Investor Day in October of 2021, we laid out our plan to grow adjusted EBITDA to $1.2 billion to $1.3 billion by fiscal year 2025. We said, we expected to achieve that goal through the combination of industry-leading organic revenue growth; strong and stable margins, allowing for continued investment in our people, innovation and infrastructure; and capital deployment that prioritizes strategic acquisitions. The results of the last several quarters put us on track to achieve our adjusted EBITDA targets. On balance, we see more momentum on organic growth and profit than we originally anticipated. And while acquisitions remain a priority, the pace of M&A has been slower…

Thank you, Horacio, and good morning, everyone. As Horacio noted, we are extremely pleased with our financial results, both for the third quarter and for our fiscal year-to-date. We remain the industry's organic growth leader and continue to operate the business very well. We have built excellent momentum toward reaching our fiscal year and investment thesis objectives, and we expect this momentum to continue given our strategic positioning, our strong execution and a positive budget environment through the end of the government fiscal year. Before discussing our third quarter results in detail, I will highlight a few key areas of our fiscal year-to-date performance. Over the first three quarters, we delivered 9.5% organic revenue growth. This is a result of us winning work aligned with our VoLT strategy and hiring, retaining and efficiently deploying the right talent. Our adjusted EBITDA margins of 11.5% in this period reflect continued strong contract level execution and prudent cost management. We deployed $714 million of capital through three quarters, a combination of dividends, share repurchases and the strategic acquisition of EverWatch. As a result, Booz Allen remains on track to achieve our investment thesis goals and to continue delivering excellent value to our shareholders. Now please turn to Slide 6, as I discuss our third quarter results in detail. At the top line, total revenue in the third quarter grew 12.1% year-over-year to $2.3 billion. Revenue excluding billable expenses grew 11.2% to $1.6 billion. Almost all of this growth was organic, as our organic growth accelerated to 11.6% for the quarter. I am particularly pleased that our revenue growth was driven by double-digit contributions from each of our three federal markets. In Defense, revenue grew approximately 10% year-over-year led by strong performance in our Aerospace and Joint Combatant Command accounts. In Civil, revenue grew…

Certainly. [Operator Instructions] And our first question will come from Sheila Kahyaoglu [Jefferies]. Your line is open.

Good morning, everyone. And....

Hey. Sheila...

Thank you for the time. So, Horacio, in your opening remarks, you mentioned M&A as a strategic accelerator, and you typically haven't done deals, but you're focused on them now. Can you maybe give us an update on Liberty and Tracepoint, as well as EverWatch, given you just closed the books on that one? And it seems like the revenue contribution is coming in a lot better there?

Yes, absolutely. So let me start by saying, we're very happy with the results of the quarter and particularly happy with the organic performance of the business, which is really ahead of our expectations at this point on the trajectory of our investment thesis. And as I mentioned on the opening remarks, we are a little bit behind where we thought we would be at this point on the M&A side, largely environmental factors. But overall, we're very pleased with what we are on the journey, and we're on track. And that's really the key message. One click down from that. As I mentioned, now work backwards, EverWatch is finally closed in October, we're integrating it. There was a little degradation of talent levels, while we were waiting for it to close. And so we're accelerating their hiring because they have pretty robust demand there that we want to meet, and that's where that is. Tracepoint is getting fully integrated into our commercial business. As you know, that is a small acquisition and a small business, but it's an important capability as we do incident response more aggressively across the commercial market. And then Liberty, which is now fully integrated into our business, has been an extraordinary success and continues to be - they are - it's a big part of our health team. They brought low code, no code capability that is both really valuable across the health account, but really increasingly across the federal government, and we're really pleased with that. So overall, we're looking to do more things that look like Liberty. They're hard to find. And we're - as Matt always says, we're going to be patient and disciplined on this, and that's where we're going.

Thank you for that. Maybe if I could follow-up just on the civil business as a whole, which clearly includes Liberty. You mentioned, I mean, the business is growing at a spectacular mid-teens rate. So what's sort of driving that? You mentioned health and cyber mission work. Is it a few contracts? Or is it just you're going into new addressable markets there?

It's broad-based. I think that's a great question. I think this speaks to really VoLT and Velocity and everything else that we are doing across the business. This notion of inserting new technology into existing missions really resonates with our clients. It's what they need to do to meet the demands of the moment. I honestly believe it is what's driving this double-digit growth that we experienced this quarter and really the broad-based growth across many parts our portfolio. In civil, in particular, it's not just health. There is significant elements of our treasury business that are growing very well. And we're happy with what we're seeing. I mean, the civil agencies are focused on digital transformation. They need to be, and we like to believe that we are a catalyst and a partner with them on this journey, and that's what underlies our growth opportunity.

Great. Thank you.

Thank you.

One moment. And our next question will come from Bert Subin of Stifel. Your line is open.

Hey, good morning.

Hi, Bret, good morning.

Hey, Horacio, you noted before and you've noted over time the Booz is supply not demand constrained. Now you just grew client staff down kind of almost 4% quarter-over-quarter, which is clearly benefiting sales. Do you have any concern that pendulum starts to swing the other way and utilization becomes a factor, maybe not this quarter, but as we go further into the calendar year?

That's a great question. And here, I want to give credit to really our team and operating teams, the work that Kristine Martin Anderson and our people team are doing. They really have re-wire the way we hire to - against the velocity dimension, so that we actually can hire faster. And then - and this is really mentioned, we really haven't spent as much time before so that we can put people that are hired into billable opportunities faster. And I think we're seeing some benefit of that. The other benefit is demand, as I mentioned, is very strong across the board. And so I'm not sure even if we wanted to, that we could keep people on the bench very long. So you put all of that together and at least for the moment because who can predict the long-term future, there's a lot of momentum in the business. And we are doing this - we're seeing this dynamic where we're hiring at almost record levels or at record levels, and we're placing people on contract fast enough that our billability or utilization is remaining very, very high. So again, when we talk about confidence and momentum in the business, that's - I think that's what's underneath a lot of our words.

So maybe just for my follow-up. You also mentioned during your prepared remarks, greater clarity for your customers post budget in late December. Have you noted any acceleration in spending following the passage of the budget? And if you haven't, when would you expect that to start materializing? I could that provide some acceleration from the already high growth you're seeing.

I - we have not seen a significant change. I think what we have seen is a steadiness and confidence that the emissions that they're focused on are going to be supported at least through the balance of the current fiscal year. And so I think that's been positive. As we've noted and others have, the award environment isn't the fastest we've ever seen in terms of things moving to the ride and protests and all of that. That seems to continue. But against an overall very strong demand backdrop, as you can tell by our numbers, we're obviously not demand constrained. We're doing really well on hiring. And when you put it all together, again, it's a story of both momentum that we've seen over the last few quarters, and we expect - or we hope to continue.

Thank you, Horacio.

Thank you.

One moment. And our next question will come from Louie DiPalma of William Blair. Your line is open.

Good morning, Horacio, Matt, Nathan and Meg [ph]

Good morning, Louie.

Good morning, Louie.

Horacio, near the end of last quarter, you secured a $2.2 billion contract called Morphick. That seems pretty strategic in addition to being one of your largest ever awards. Was this contract a big driver of your strong organic growth in the December quarter? And can you provide more detail about what the contract pertains?

So we were a little limited in terms of what we can say about that particular contract. It's - I guess, what I will say is it's still - it's over piece of all of the work that we keep talking about where we're bringing leading-edge technology into existing mission sets, programs of that size ramp slowly. I think the message I would likely to take away is the growth that we're seeing is broad-based. That's obviously a defense contract. And as you can see, both civil and security also posted very strong growth. So we're seeing strong demand across really, I can't say it's every single part of our business, but lots of aspects of our business. And the team is doing a great job of hiring against our demand, bringing in the right people, with the right clearances and the right technical expertise, so that we can ramp up and continue the momentum.

Great. And for Matt, I think you mentioned the possibility of accelerating M&A in the future quarters. Should we expect acquisitions to be small sub $1 billion type so that they are easily digestible? Or do you have any aspirations for a much larger transformative acquisition?

Thanks, Louie. Never say never. But I think right now, we're more focused on small to mid sized tuck-ins that are strategic accelerants. We're really pleased with our capital deployment to date, deployed $510 million in the quarter, including EverWatch. And as Horacio said, they've got some short-term hurdles they need to overcome on the supply side. But from a demand perspective and in terms of long-term strategic value, we really see it as an opportunity for us to transform portions of our intelligence business. So we're working it. We've got a pipeline. As you know, the M&A market has been and relatively slow in the past couple of quarters for a handful of macroeconomic reasons. But we're going to play the game that's in front of us. And the strength of our balance sheet just gives us a lot of flexibility to do that.

Thanks, Matt. And thanks, Horacio.

Thanks, Louie.

One moment. And our next question will come from Cai von Rumohr of Cowen. Your line is open.

Hi, Cai, good morning.

Thanks so much. Yes. Good morning, guys. So you mentioned protest is a reason for the soft bookings. Could you walk through the large Intel contract, is that one that you were awarded and now is being - is under protest and maybe give us some color on some of the others, too, if you could?

I think, generally speaking, this is what I can tell you. I think the contract that you're describing, I mentioned briefly last call and Matt talked about it in the prepared remarks, it relates to our cyber work in the Intel market and has overlap with some of our existing contract. The award was pulled back and it's been re-evaluated. So it's not technically under protest. And so we - as you know, because you've followed us for a very long time, we generally don't comment on specific procurements, while they're under evaluation. Here's what I can tell you about the processing well, about this dynamic in particular and then the broader environment. The - as you know, we're not demand constrained. We have $30 billion in backlog. And even with our record hiring, we're still having filled every rec. And the place where it's hardest for us to recruit is in clear technical staff for work in the intelligence community. And so we still have a lot of open recs there and now a significant volume of open recs had EverWatch. So our goal ultimately in this area is to retain and grow that workforce and deploy it against the work that is in front of us, I think we're doing well there. There's more work to do because, ultimately, we want to continue to grow that workforce as the way which we grow the Intel business overall. And then the last point I would make on the protest environment overall, that continues to be a slow process. We have a number of things that have slid to the right as a result of that. I think that we are very optimistic about the awards picture in the near term, as we mentioned in the prepared remarks. And we're feeling good about the overall demand picture and the momentum that we have.

One broad follow-up. It seems like there's plenty of money around to make awards, but sort of across the industry, it seems like the activity is a bit slower. Some of your peers have talked about the lack of contracting officers. And as you know, the process to become a contracting officer is pretty onerous. Do you see that as a problem that there's just not enough qualified people to kind of make the awards, and that's 1 of the reasons things are slowing?

Yes, to the extent that the contracting workforce in the government has been constrained for a long time, and they've been under pressure for a long time. Again, you and I have been on these calls for a while, I mean there was a time where, for example, the department wanted to re-compete things more often. And so that increased the workforce or the workload on the contracting shops significantly without a corresponding increase on the headcount that needed to address that from the government side. And that's been a perennial issue. I don't know that it is any worse now than it's been in the past. Again, ultimately, from our perspective, the - I'm sorry, I'm saying it again, but the demand picture right now feels very strong.

Got it. Okay. Thank you very much.

Thank you.

One moment. And our next question will come from Matt Akers of Wells Fargo. Your line is open.

Good morning. This is Eric Allen for Matt. Just a quick follow-up on book-to-bill. I know it's more of a timing thing, but was there anything taken out of the backlog, any cancellations there?

No, nothing meaningful. I think the top line message is we have the backlog and the award and proposal pipeline we need to meet our near and medium-term growth aspirations. And even more important, the capabilities and solutions we're building in line with our VoLT strategy are really resonating with our clients. So we said it both in stronger quarters like Q2 and lighter quarters like this one that we want to focus - we focus on last 12 months book-to-bill. And if you look back at where we were at the end of Q3, the prior fiscal – three fiscal years, that was between, let's say, 1.15 and 1.3 and right now, we're at 1.22. So we're right in line with where we want to be and Q4 is shaping up well.

Okay. Thanks. If I could do one more. I think we're seeing more military aid packages being sent to Ukraine lately. So just wondering, if you're seeing any benefit from all the support money?

I had the pleasure of spending time with our team in Europe late last year and just be inspired and amazed by the work that they're doing in support of our government as our government supports Ukraine. And so we're well deployed in the middle of that mission, helping drive intelligence, helping drive analysis and doing really good work. So overall, that - sort of that's our posture. It's a posture that is longstanding. It's a longstanding team that has pivoted to this mission. There's obviously been some growth on the team as a result of additional mission needs. I would expect that to continue. But I don't see that as a meaningful driver of growth as much as I see it as a real demonstration of the great work that we got on people can do as we bring technology to the mission needs.

Okay, got it. Thank you.

Thank you.

One moment. And our next question will come from Tobey Sommer of Truist. Your line is open.

Thanks. I wanted to ask a question about the debt ceiling negotiation. As these proceeds, but do you have see any risk to the spending patterns in the current fiscal year as procurement officers' kind of watch this being bantered about in the news? And are there any analog experiences in history that you would reference as sort of being benchmarks or examples of how impacts either emerge or don't?

It's really hard to predict that what will happen sort of second and third order effects of the debt ceiling debate. It's even hard to understand what the first order effects will be. I will say this. I mean, obviously, a protracted fight on that in our view is not good for the country, and it's certainly not good for our clients and by extension is not great for us. I think part of our approach to all of this is - and this is why - is to build momentum to drive the business that's in front of us, to grow organically, to have the right people doing the right work at the center of these missions, which tends to be more resilient to overall sort of external uncertainty. That's what we have done in the past. That's what we are doing now. And that's what gives us confidence that despite the fact that there's that issue, there's next year's government budget and all of that, which are things that we are watching very closely. Ultimately, we are on track and remain on track to deliver our investment thesis to advance VoLT and to be the kind of partner to our clients that they need us to be right now.

And the industry has a lot of experience, unfortunately, with budgetary uncertainty. We have it. Others in the industry have it. And as Horacio said, we've told the team is play the game in front of us. And the best thing we can do is to prepare for uncertainty is to build as strong a business as possible. And we feel like we're well positioned strategically through Volt, as Horacio mentioned, and our client positioning operationally. We're running the business very, very well. I think more disciplined than we've ever run it. And financially, given the strength of our performance and the quality of our balance sheet. And we sort of glossed over it because there's a lot of news in the quarter, but I think us being upgraded to investment grade is a reflection of that.

Absolutely. As you look at your principal government customer sets in civil, defense and Intel, how would you stratify the growth prospects for calendar '23? And does it sort of purely map against headline budget outlays and growth this year? Or is there a nuance or difference among them?

You know, from my perspective - well, first of all, as you see, we have strong growth across the board right now. And the type of work that we are doing under VoLT, the work we're positioned to do, again, around bringing AI, cyber, digital transformation into existing missions, into expanded mission scopes around space, around INDOPACOM in China around some of the key issues, which at some level are some of the few bipartisans remaining give us confidence that we are doing the right work and in the right place. And at least for the immediate future, the increases in head count and the speed at which our headcount is - our people are getting on programs give us confidence that the business has strength. And that's our approach, and it's not limited to one small piece or another. It's where - we believe that's a broad-based view.

Thank you.

And one moment. Our next question will come from Mariana Perez Mora from Bank of America. Your line is open, Mariana.

Good morning, everyone. Thank you for taking my question.

Good morning.

So my question is about free cash flow in order for - to get to hit your cash from operations outlook, you have to generate more than $200 million net of a fair amount of tax payments. Could you please give us some color on how to bridge to that $200 million-plus free cash flow generation?

Happy to. Our cash performance year-to-date has been solid. Again, that's why we reiterated guidance. Thankfully, we took a conservative approach and didn't assume 174 would be repealed. So we anticipate, and you see that in the bridge we provide an - we provided in the presentation initially 174 being about 170 - about $140 million this year, and we have $175 million of other cash taxes. So to get to the bridge that you described, we're obviously growing, and collections are keeping pace with growth in Q3. Outlays were also up, including a couple of things that were temporal. So we feel like we've got the ability to generate cash and invest in the business and hit our targets in the guidance.

Thank you. And then a follow-up to Tobey's question on consumer resolution or like this potential year-long continue resolution next year. I understand that the right strategy is prepared to the future and not for the headwinds of the process to get to that future. But can you help us understand, how much of a headwind could be a year-long Continuous [ph] solution into your organic growth?

At this point, I think it's a little premature to try and speculate what the budget picture will look like next year and how it might play out. I think as just Matt pointed out, we and the industry have become very adept at managing through this budget turbulence. We - and I think that's ultimately what we are focused on, I think when we get closer, if we know more and there's more clarity, we'll be happy to engage at that time. The one thing I can tell you is our business right now is doing well, their strength on the demand side, their strength in the supply side, their strength on the balance sheet. And all of that strength put together give us confidence that within reason, we can - we're preparing well to weather a storm and deliver on our investment thesis commitments through FY '25.

Perfect. Thank you very much for the color.

Thank you.

And I'm showing no further questions at this time. I would now like to turn the conference back to Horacio Rozanski for closing remarks.

Thank you, and thank you all for joining us this morning. As we come to a close on this call, let me first recognize that we have a new member of our Board of Directors. As we announced last week, Rory Read has joined the Booz Allen Board. Rory is Senior Vice President at Ericsson and the President and CEO of Vonage, which is Ericsson's global telecommunication platform. I'm really excited to have Rory on our Board and I'm already seeing how we benefit from his expertise, both as a technologist and as a business leader. And then lastly, I want to take a moment to acknowledge and recognize and thank the amazing people of Booz Allen. For sure, for their hard work and dedication because it's their hard work and dedication that delivers the exceptional results, we were able to discuss with you today. And also for their generosity and what they do for the communities in which they live and work. And specifically, through our year-end giving campaign, our employees contributed more than $1 million think about that word, more than $1 million to the causes that they are most passionate about. And because of the firm's match, we ultimately gave over $2 million to more than 2,000 non-profit organizations, and this is the highest impact we have ever made through year-end campaign. Our people's commitment and service to our communities, to our clients, to each other, they're the core of who we are. They are the core of our purpose and our values. So I come to work every day, it is really my colleagues that inspire me. So I just want to say, once again, thank you. Thank you, Booz Allen. And on that note, thanks again to all of you for joining us, and have a great day.

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