Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's Earnings Call covering Fourth 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.

Thank you. Good morning and thank you for joining us for Booz Allen's fourth quarter and full fiscal year 2023 earnings call. We hope you've 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 Horacio Rozanski, our President and Chief Executive Officer; and Matt Calderone, our Executive Vice President and Chief Financial Officer. As shown on the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning are forward-looking, 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 of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter and full 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 four.

Thank you, Nathan, and good morning, everyone. Thank you for joining the call. Matt and I are pleased to share excellent financial results for fiscal year 2023. Every day the people of Booz Allen bring their best to our client's most critical missions. Their hard work and dedication continue to produce outstanding outcomes. Over the past year, we have strengthened our momentum and continued to deliver industry-leading organic revenue growth. Today, Matt and I will discuss the full year results and our fiscal year 2024 guidance in the context of our investment thesis. I will also share an update on the leadership dimension of our VoLT growth strategy and describe our priorities for the year ahead. Let's begin with fiscal year 2023, another outstanding year for Booz Allen. Our performance puts us on track to deliver on our investment thesis which we first discussed with analysts in October of 2021. Our investment thesis targets growing adjusted EBITDA to $1.2 billion to $1.3 billion by fiscal year 2025. We expect to accomplish this goal through the following levers, industry-leading organic revenue growth in the range of 5% to 8% annually, adjusted EBITDA margins in the mid-10s. We continued investment for future growth and $3.5 billion to $4.5 billion in total capital deployment that prioritizes small-to-mid-size strategic acquisitions. At this point, organic growth and profit are above our forecasted ranges and inorganic contribution is somewhat behind base. When put together, we are on track with excellent momentum and optionality as we move into our second year in the planning horizon. Diving deeper into the full FY'23 results, it is clear our leaders are doing an excellent job on hiring, selling, and the cost management priorities we outlined last May. Total revenue grew 10.7% fueled by a record selling 10.6% client staff headcount…

Thank you, Horacio, and good morning, everyone. I too am very pleased with our operating and financial results. We had a strong fourth quarter, closing out an excellent fiscal year 2023 at both the top and the bottom lines. The momentum we built on both the supply side and the demand side, positions us well for the future as you will see in our fiscal year 2024 guidance. Booz Allen continues to produce industry-leading organic growth. Our margins are underpinned by the quality of our offerings and the strength of our execution. We are augmenting and accelerating our organic performance with a patient and disciplined capital deployment approach, and as a result, we remain on track to deliver on our multi-year investment thesis. I have a lot to cover today, so I will start by hitting the highlights of our fourth quarter performance then turn to our fiscal year 2023 results and finally close with our fiscal year 2024 guidance. Our fourth quarter results were in-line with our expectations as we finished the fiscal year strong while investing in the talent and the capabilities to drive future growth. In the fourth quarter, we delivered overall revenue growth of 8.7% year-over-year and organic revenue growth of 7.7%. This performance was driven by continued headcount growth, a solid book-to-bill ratio of 1.47 times, and client staff utilization that declined in the fourth quarter but is in line with our current growth posture. Adjusted EBITDA for the quarter grew to $231 million, an increase of 13% year-over-year. This was a function of our overall growth, strong contract-level performance, and continued efforts to operate more efficiently. This translated to us generating $1.01 in ADEPS for the quarter, a growth of 17% year-over-year. In the quarter, we returned $191 million of capital to investors, primarily…

Thank you. Our first question comes from the line of Bert Subin with Stifel. Your line is now open.

Hey, good morning, and thanks for the question.

Good morning, Bert.

Good morning, Bert.

Good morning. So Horacio, hiring has been really strong and your results are reflecting that. You have a couple of contract headwinds that you alluded to as we think through FY'24. How are you contemplating the potential risk of just trying to reallocate that labor? And if the tighter budget backdrop does ultimately materialize, is the plan just to slow down hiring so that supply matches demand?

Thank you for that question. I'll start. To answer your specific question, I think you're asking the Focus Fox question. To give you some background there. Our contract now that the proposal that the protest has been adjudicated, we can talk a little more about this. Our contract will end on September 30th. Roughly speaking, we have about 400 Booz Allen people on the contract. We expect to retain about half, about 200 and reallocate them to other mission priorities. We have a lot of important cyber work going on throughout the firm that these folks would be tremendous for. So that's sort of the play on that. In the greater scheme though, when you look at the business overall, the business is doing great. I'm incredibly proud of where we ended last year with industry-leading organic revenue growth with a lot of momentum, as you pointed out. There's momentum on both sides. I think on hiring and retaining, there's great momentum, but there's also a number of contract wins and around things ramping up that make us feel like certainly over the next six months, the business is poised to perform very well. We are cognizant, as everybody else is that the second half is going to be challenging from a budgetary standpoint. And so our guidance for FY'24 reflects that range, if you will, the lower end of the range speaks more to a more challenging environment. The upper end of the range speaks more to a second half that looks more like a first half. But even if I get past that, and I look at the investment thesis horizon and everything else, we're on track. VoLT is paying the dividends we wanted it to pay and it positions us well for the long-term against topics like China, like AI, like 5G, cyber, quantum, I could keep going. So the business is in very good shape.

Horacio, maybe on the one of the latter points you had there. Booz has been talking about AI for the last few years. And you gave a good update on your progress there. Now that there's been, I guess, more material inflection in AI-related demand just in the last few months, can you just walk us through what you've been seeing in your business and, I guess, more recently? And how meaningful of a revenue driver you're planning for AI to be in your fiscal '24 guidance?

AI, as you pointed out, this is a topic that has been near and dear to my heart given my own background and something that we, as a firm, have been very focused on. We have a leading position that's backstopped by a talent base that is very large and growing at around 20% per year. A contract base that has not just some really big AI contracts, but we're infusing AI into all of our major procurements to the extent that it makes sense, and it increasingly makes sense, more and more clients are interested in either having the option to imbue AI or asking for it directly. And so this becomes a differentiator not just against our AI portfolio, but against our whole business. We have some unique IC and IP in this area that we're very proud of. I talked about AI-Assemble. There's a number of other things that we are doing. And the partnerships that we've built and we continue to build also give us an edge in the market. We have talked for years about the co-creation that we do with NVIDIA around in Cyber Precog. I spoke about that a couple of calls ago. We talk about the things we're doing with our corporate venture fund, finding small companies that have unique technologies, I really do believe that it's not just that we're a leader today in the federal space, but that we are poised to project that leadership more broadly over time.

Thank you, Horacio.

Thank you.

Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.

Good morning, Horacio and Matt and thank you so much. I wanted to expand upon the AI comment Horacio because I know you guys do so much there and you just talked about it a little bit. Within the next five years, how do you envision the DoD or your several customers implementing AI?

Let me first say that my crystal ball is the same as everybody else is. I do believe that this is going to be a huge area of focus for all of our clients. If you break it down, first of all, the digital transformations that we're seeing that really affect our entire client base, especially our civil client base are going to require more and more use of AI to accelerate everything from coding to verifying to then managing these very large systems and very large, if you want, citizen interactions, there's just so much that AI can do to both lower cost and improve the way in which citizens interact with the federal government at the civil level, and that is huge. On the other side, on the national security side, I also believe that AI is going to increase the efficiency and reduce the decision cycle that our clients need to go through. And tying it to our other priority, this is very important as it relates to China, which, of course, is also investing heavily in AI and the US, which still has a lead, has to continue to maintain this lead. Our clients understand that, congressional leaders that I've spoken to understand that. Everyone is trying to figure out how to do this in a way that is both aggressive and sensible from the standpoint of being ethical and being very thoughtful about it. And again, we have both the brand, but most importantly, the capabilities and the people to be central to that conversation.

Great. Thank you. Sorry for putting you on the spot with that. And then maybe Matt, one for you.

No, no. I appreciate it. This is a great question.

Matt, for you, when we think about the cash guidance, operating cash flow guidance and about 70% free cash flow conversion versus 87% in '23, what sort is keeping you guys from getting to that 100% outside of Section 174?

Yeah, good question. we said we're targeting free cash flow yield of approximately 10% excluding 174. In '23, we delivered 110%, which was great, and we are going to be below that in '24 for a couple of reasons that we think are temporal. We are seeing an increase in working capital consistent with the rapidly growing business, particularly on the outlay side. Second and we talked about this last year, but there's some timing related issues related to some tax strategies we've been discussing. This year, we're going to have an incremental $50 million in cash taxes, but likely with no corresponding offset related to those tax strategies. But I will point you to an approximately $150 million receivable on our balance sheet that we do anticipate receiving in future years. And then obviously, we, like everyone else, are experiencing higher interest expenses. So I do expect, Sheila, to be in a meaningfully better position in FY'25 as some of this is temporal.

Okay. Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Robert Spingarn with Melius Research. Your line is now open.

Hi. Good morning, everyone.

Hey, Rob. Good morning.

Horacio, I wanted to ask and perhaps this is for Matt as well. But as we think about all of the budget discussions and the potential for growth to be at the lower end of some of the predictive ranges of late, just based on what we're seeing come across in real-time on the fiscal '24 budget and what that might mean for holding growth. Beyond that, is there a concern perhaps that some industry players may try to compete a bit more aggressively on price in that kind of environment and that contract that margins just generally could come under pressure for the industry?

It's an interesting debate. And we've seen this before right in the 2011-2012 timeframe. If we end up in a sort of more moderated budget environment in the next couple of years. And we've --- again we've -- from the standpoint of our '24 guide, we have taken some of the historical turbulence into account as we think about the second half of our business. On your specific question, there's always price pressure in this industry. This is not new. As you know, we have migrated our business to the extent possible to things that are at the center of our clients' missions that require much more technical content, that require a much more specialized IP and IC that make use of these partnerships and create more differentiation. We are always competing on price. Everybody else is, but I think we are in a somewhat less price sensitive part of the market because of the uniqueness of what we do. And at the same time, as I pointed out, Matt has pointed out in prior calls, we're also growing our business faster than we're growing our infrastructure in our back office in order to create flexibility in our operating model to be able to manage through the cycle. So if I step back and I say, okay, we have an investment thesis of $1.2 billion to $1.3 billion of EBITDA by FY'25, we're on track to deliver that taking into account, again, a reasonable market projection.

Okay. And then just as a follow-up to that, maybe in a similar vein, if defense is more protected in these budgets than some of the nondefense work, might you see the growth, both in revenues and EBITDA play out a little bit differently than in your internal plan, meaning that Civil perhaps becomes a bit of a bill payer across the government for defense and so you grow the one business more than you might have expected at the expense of the other?

I'll start and I think Matt has probably a lot to say on this topic too. I'll point you to a couple of things. First of all, we have an operating model that allows us to shift resources quickly from one side to another, from one -- when we manage the business, we manage as an entity as opposed to a separate sectors on purpose so that we can really go toward the opportunities and shift leadership, resources and investment quickly as that makes sense. And I think that gives us some robustness regardless of the shape of the budget going forward. And then the other just minor point that I will make is if you think about our civil portfolio, we do have a significant amount of work, for example, with the VA and organizations that are likely to travel more with the defense portfolio than they will with sort of the more traditional civil accounts. So it is hard to tell how all of that will play out, that's why we like to stay at the macro level and talk about the overall firm.

Understood.

And reading between the lines, I think you're trying to get at, do we expect to see margin pressure? And clearly, in our guidance this year, the answer to that is no. We're guiding to -- from high 10s to the 11% range. And embedded in that, we've anticipated the defense business is going to accelerate. And I just want to double-click on what Horacio said. We're operating the business very efficiently. And I feel like we've got our hands on a lot of the levers with respect to labor economics but also some of our corporate costs. And that just gives us a lot of optionality.

Makes sense. Thank you, both.

Thank you.

Thank you. Our next question comes from the line of Spencer Breitzke with Cowen & Company. Your line is now open.

Hi. I think you're talking about Cai von Rumohr. So you just recently announced and you announced an IRS win were those wins actually made in the third -- in the fourth quarter and announced now? And then secondly, can you give us a little more color on Focus Fox why you lost? Because that's an area in which you've been particularly strong and the winter has not been as strong. Thanks so much.

Yes, Horacio, do you want to take Focus Fox first?

Yes. Cai, on Focus Fox, I think you would have to ask the client more than us. But in general, we have a very strong cyber business that is growing fast across the entire portfolio. This is one contract. And albeit a business that we wanted for a long time. It's a business that was migrating, the new contract is very different from the old one in terms of looking for lower skill sets. And therefore, it did not fully align with the type of work that we do and we like to do in the community. So I guess that's the best explanation that I can give. More broadly, though, we're seeing a lot of opportunity to deploy cyber resources across the portfolio, our defense clients with cyberspace is now really an active warfighting domain are more and more interested in making sure that they can get at scale some unique capabilities. And our civilian clients from a defensive posture are also very interested in that from a law enforcement perspective, from a critical infrastructure protection perspective. So as I look at, one of the things that we did, which we talked about in 2021, and I know you'll remember, is we built this national cyber platform where we allowed ourselves the opportunity to look horizontally across the entire cyber playing field as opposed to being stovepipe to minimize the national risk that exists in the seams of those stovepipe and that strategy has proven to be very successful.

And Cai to specifically answer to your question about EDOS and EDITS they were included in our Q4 book-to-bill.

They were. Okay. And then last one. If, in fact, you see deceleration in Intel, isn't that a margin plus a mix plus?

On the margins, but we're seeing acceleration in defense. And so the two will probably wash out.

Excellent. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Matthew Akers with Wells Fargo. Your line is now open.

Thanks, guys. Good morning. Horacio, I think you mentioned in the opening remarks that the M&A portion of your long-term strategy has been a little bit slower than it was like. Can you talk a little bit more about what you're seeing there in terms of what assets are available? And I guess if that continues, would you consider sort of other uses for the cash, maybe return more to shareholders?

I'm going to let Matt start on this one since he's got all the background.

Thanks. I think we're seeing an environment that is pretty consistent with what we've seen in the last couple of quarters, which is a lot of -- it's a small to midsized opportunities, but both buyers and sellers that are being judicious in how they approach the M&A environment. So we're actively engaged in a lot of processes. We've gone reasonably far down the path in a couple of these. But I think we said or I said measured and balanced in the script just to sort of break it up from seeing patient discipline, but we're going to remain patient and disciplined. We've got industry-leading organic growth. We've got a strong balance sheet. If you look at how we deployed capital in '23 or even in Q4 of '23, it was very balanced and we're committed to deploying capital in a measured way to drive long-term shareholder value.

Got it. Thanks. And then if you could touch on, I guess, the margins. So you're running a little bit of the sort of mid-10s long-term guidance that you've given, could you give, so what are the biggest drivers there? Is it mix or billable expenses? And is there opportunity to maybe come in ahead of that longer term if you can continue the strength?

Yes. Well, I think we've come in ahead of that the last couple of years, and we're guiding ahead of the mid-10s this year. And so clearly that's a reflection not just to the quality of the work we're selling and our contract execution, but how we're managing our cost base.

Yes. I want to just to amplify on that last point. When we built our investment thesis, we were thinking mid-10s because we also wanted to make sure we had the capacity to invest in the business in the right way. And the good news here is the acceleration of organic growth beyond what we originally predicted, opens that up a little bit. And then to Matt's last point, the fact that we're running the business so efficiently and so tightly also creates room in our rates to invest in the business and position us for growth. So that is giving us the opportunity to maintain margins above what we thought while also accelerating the investments required so that the business does well not just in '24 and '25, but really beyond.

Okay. That's helpful. Thank you.

Thank you. Our next question comes from the line of David Strauss with Barclays. Your line is now open.

Thanks. Good morning.

Good morning.

Matt, a follow-up on the cash flow question. Could you just bridge us from the $603 million operating cash flow in '23 for the $500 million to $600 million, I guess, between EBITDA, exactly what you're expecting for net working capital, R&D, broader cash taxes? Just help us with that bridge.

Yes, I'm not going to give you much more than I want to have to-date. We'll look at getting out some more detailed guidance in the appropriate forums. But essentially, the bridge is threefold, right? Higher interest, higher taxes with no corresponding offset this year, but we anticipate something in FY'25 or beyond and higher outlays consistent with the working capital required to fund a growing business where 30% of your work is done through subs.

Okay. And then a question about '25 investment thesis target. So you did a little over $1 billion in EBITDA in '23, forecasting close to $1.1 billion in '24. Is $1.3 billion possible? And as we think about 2025 or is it much more likely closer to the bottom end? And if $1.3 billion is possible, how do you get there?

We're still on track to the $1.2 billion to $1.3 billion. The business is doing extremely well. We're operating organically of our expectations. And as Matt pointed out, we are still very interested in strategic acceleration through M&A, if we can find the right assets at the right price. When you put all of that together, depending on timing and everything else, where we fall in the range that will be the guidance question a year from now. But right now, we are, again, we recognize that the budgetary situation is challenging that this creates uncertainty. We all read the papers this morning. There's still no deal on the debt ceiling. I think all of that is real, and we're not ignoring it, but we believe that as a business, we are well positioned to have a very strong first half to manage a reasonable set of outcomes in the second half, to deliver another year of organic revenue growth that leads the industry. And that hopefully positions us really well to have a strong '25 as well. So when you put it all together, we're working on what we can control. And if I can just do a shout out to the team, our team is doing an exceptional job of doing just that.

Great. Thanks very much.

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

Thanks very much and good morning.

Good morning.

I wanted to follow up on the Intelligence segment. And moving aside from just the Focus Fox contract, I think we've talked about that. But just as a percentage of sales, the intelligence portions, I think, down probably about five percentage points versus a few years ago. And kind of how you see that evolving in the mix? And is there something changing about that end market that kind of makes the opportunity there sort of less aligned with where you want to take the company?

The Intel business is a very important part of our portfolio. We are very proud of the work that we do there. It fits within our overall national security approach. And there's a very close integration between what we do in defense and what we do in Intel. And increasingly, between what we do in some areas of Intel on the cyber side and the work that we do on some of the civilian agencies around critical infrastructure protection and the like the percentages and everything else are really driven by where we see opportunity at any point in time. In the last few years, our Civil business has done extraordinarily well and it's become a bigger share of our business and that's a business that continues to do very well and we're very proud of it. As we look into this year, I think we think our Intel business will probably level out, be more sort of towards the modest growth, maybe even flat as are -- there's been some contract turnover that we've been talking about. But I think what's really important to also talk about, which is not going to be in the numbers, is that there's a unique talent base in there that through our national cyber platform is being leveraged across the institution and creating growth in both defense and civilian clients and creating a lot of sustainability across the business. I think that's a big part of why Booz Allen is successful through different cycles is that we actually have in our operating model and the way we work together the ability to shift resources, I believe, much faster than anyone else. And I think that's a capability that is going to continue to serve us well, given the environment that we're in right now.

And if you think about the leading-edge capabilities that Horacio has talked about, a lot of them have been really built and incubated into our Intel business. So in terms of the role it plays in our portfolio, historically, it has not grown as quickly as other portions of our portfolio, largely because of supply constraints in a highly clear environment. But the capabilities that the Intel business develops and we export across the remainder of our business in addition to the people Horacio described really are fundamental.

Excellent. That's helpful. Thanks very much. And then just as a follow-up, I wonder if you guys could talk a little more specifically about this kind of second half budget environment that you're thinking about, just to kind of put a fine point on it? Because there's one set of outcomes that maybe people had been thinking about that was sort of involving government shutdowns, continuing resolutions, kind of really challenging kind of scarier stuff. And then there's another kind of path that's been talked about in some very recent reporting that's kind of, okay, maybe there's very low single-digit growth in the defense budget over the next few years, which maybe is not an ideal outcome, but given the other possibilities, not that bad either. So when you talk about a slowing second half and kind of not seeing the momentum continue in the second half, was that based on the idea of like full year continuing resolution government shutdowns type of scenario or an environment where we do get low single-digit growth is a good outcome or is that kind of consistent with kind of a real slowdown in the second half?

If you look at our guidance, 7% to 11%. The top end of the range assumes that the second half looks a lot like the first half, a little bit more like what happened this last year where there was a full budget passed in December and that actually created certainty for our clients, and that was very helpful. Towards the end -- the lower end, it would be more uncertainty faced by our clients. I want to point out to you in a business like ours, the specific numbers, we don't have almost any programs that are dependent on line item in the budget. So this is really around how our clients see their opportunity to get things done and how either enable or impaired that it's going to be, and it's more of a perception from their perspective around what's happening than a specific number. So the sooner there is certainty about what's going to happen almost regardless of what that certainty is the more our clients can prioritize, I think we're well positioned. We're not going to be immune to cuts if there are cuts, but we're well positioned to be more resilient against that because we're at the center of the mission, doing unique and very important work. And that's -- so it really is how soon do we get to certainty. But overall, again, I'll leave you with a thought that we are guiding to a very strong set of numbers for FY'24, very strong organic revenue growth and really on track with what we said was our investment thesis goal for FY'25. So we're happy with where we are.

Okay. Great. Thank you very much.

Thank you. This concludes the question-and-answer session. I would now like to hand the call back over to Horacio Rozanski for closing remarks.

Let me thank you all for your questions and for joining us this morning. As always, Matt and I are very proud of what the firm has accomplished and we're optimistic about the future. We have 32,000 people almost at Booz Allen now and they're working as hard as ever to serve our clients and to really change the world. And it's because of them really because of them that Booz Allen continues to thrive. So we look forward to another year of growth and success in fiscal year 2024 and to sharing information with you over time. Thank you again for joining and have a great day and a Happy Memorial Day.

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