Booz Allen Hamilton Holding Corporation (BAH) Q2 2027 Earnings Report, Transcript and Summary

Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering Second Quarter Fiscal Year 27 Results. At this time, all participants are in a listen-only mode. I would now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg.

Thanks, Carmen. Good morning, and thank you for joining us for Booz Allen's Second Quarter Fiscal Year 27 Earnings Call. We hope you have 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 2. With me today to talk about our business and financial results are Horacio D. Rozanski, our Chairman and Chief Executive Officer; Kristine Martin Anderson, President and chief operating officer and Troy Lahr, executive vice president and chief financial officer. Shown in the disclaimer on Slide 3, some of the items we will discuss this morning are forward looking and may relate to future events and, as such, 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. 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 our second quarter fiscal year 27 earnings release and slides. It is now my pleasure to turn the call over to our Chairman and CEO, Horacio. We are now on Slide 4.

Thanks, Dustin. And good morning, everyone. Thank you for joining the call. Tobey, Kristine, Troy, and I will share Booz Allen's results for the second quarter of fiscal year 27. The headline is this. Booz Allen is on track with the expectations we set for this fiscal year. We delivered strong profitability and cash generation while continuing to invest for the future. The amazing people of Booz Allen are executing exceptionally well. Both operationally and by accelerating our strategic transformation to drive our next phase of growth. In just a moment, Kristine will discuss our business trajectory, and Troy will cover the detailed financial results and updated guidance. Ahead of that, I will focus my remarks on the broader forces shaping our market and the progress we are making in accelerating our cyber and defense tech growth vectors. On our July earnings call, we said there would be some uncertainty around the federal budget process and funding as we approach the end of the government fiscal year. And we did see those dynamics play out during the second quarter. At the same time, demand for advanced technology solutions and products remains strong. Driven by the growing urgency to transform the nation's most critical missions. Ongoing geopolitical conflicts and the changing nature of warfare are increasing the need for advanced capabilities at the tactical edge. Artificial and now superintelligence or SI for short, is powering more sophisticated cyber threats. And across the entire federal government, there is growing need to modernize critical systems and deliver better outcomes through technology. At Booz Allen, we are innovating and investing to meet these needs. We are accelerating our cyber and defense tech products and solutions applying SI and Agentic across our work, and building capabilities in emerging technologies like physical SI, quantum, and 6G. Tobey, I will focus on the progress we are making in 2 of these areas. Cyber and defense tech. I will begin with cyber. Agentic SI is fundamentally changing the cyber threat landscape as you see in the news every day. Adversaries can now launch autonomous attacks with the speed, scale, and persistence that traditional defenses were not designed to defeat. As a result, we are seeing significant demand for advanced cyber solutions across government and commercial markets. Booz Allen is well positioned to meet this demand. Our cyber capabilities span from cyber operations and zero trust, to incident response and SI enabled cyber defense. We serve all 16 critical infrastructure sectors dozens of Fortune 500 companies, and, of course, numerous federal customers. We are building on these strengths. With new products, including our Velox Agentic Cyber product suite. Velox combines our deep cyber tradecraft with our proprietary technology to help customers defend against evolving threats at machine speed. 1 notable example is our counter-SI product we call Guile. Guile is designed to counter an SI enabled attack in real time. In testing at scale, Guile reduced attack success rates by more than 95%. And it is currently in private beta with government and commercial customers. We believe the combination of established cyber capabilities and our growing product line positions cyber to drive significant top and bottom line growth. Shifting to defense tech. Across today's national security environment, sensors and systems generate vast amounts of data. While autonomy, SI, and other advanced technologies are transforming modern warfare. Our customers need mission proven products. That turn data into actionable information. To help war fighters make faster, better decisions all the way to the edge. To accelerate our ability to build and scale these products, we acquired Ultra I&C Mission Solutions in August. Ultra brings a portfolio of commercially proven, software centric, hardware enabled defense tech products that are highly complementary to our own. Just as importantly, Ultra brings an established customer base already relying on these technologies in operational missions. Ultra and Booz Allen have partnered successfully for years. Now as 1 company, we will integrate our technologies to address mission gaps faster and more effectively than each of us could do alone. I believe some of you had the opportunity to see both Booz Allen and Ultra products at last week's AUSA conference. There was very strong customer interest and engagement at both our booths. We are excited about what is ahead as we integrate our products and pursue market opportunities together. And 1 final thought before I close. Cyber and Defense Tech actually reinforce each other. Our world class cyber capabilities make the defense tech products we bring to market more secure. At the same time, our defense tech portfolio creates new opportunities to strengthen and scale our cyber products for missions at the edge. Taken together, they expand what we can deliver to customers. The progress we are making across both areas gives me great confidence in our ability to accelerate our medium term growth. And with that, Kristine, I will turn it over to you to discuss the trajectory of our business.

Thank you, Horacio. We continue to operate in a bifurcated market. And our second quarter performance reflects those dynamics. National security continued to grow, while civil remained in transition. We see strong demand in our national security business, predicated on our ability to deliver innovation, and new technologies to accelerate missions. We are ramping up new awards quickly, scaling our cyber and defense tech products, and continuing to help our customers transition to outcomes based contracting. And we are already seeing progress in that transition. Within national security, our firm fixed price contract mix has increased by 3 percentage points year to date. This shift is creating opportunities to bring more value to our customers and improve profitability over time. More broadly, we expect national security growth to accelerate in the second half. Turning now to civil. Our focus is on rebuilding the portfolio and gaining momentum. We are seeing demand for Agentic software development and SI ready data platforms across multiple missions. We expect Civil's year over year decline to moderate in the second half of the fiscal year as new work ramps up and additional awards come in. On the whole, we remain on track with the expectations we laid out for the fiscal year. Heading into the second half of the year, our 3 operating priorities are delivering excellent outcomes for our customers, driving strong business execution, and transforming and investing for growth. Our goal is to bring our strategic efforts to fruition leading us back to above market top line growth and even better bottom line growth. With that, Troy, I will turn it over to you.

Thanks, Kristine, and good morning, everyone. I am pleased with our continued strong operational execution, including capturing strategic awards, delivering profitability above our expectations, and generating robust free cash flow. Through our investments and operational discipline, we continue to position the company for durable, long term growth. Now let me walk you through our second quarter performance in more detail. Second quarter revenue declined 3.9% year over year to $2.8 billion. The decline was largely due to a 10.6% decrease in billable expenses year over year. As a result, revenue ex billable expenses, where nearly all of our profit is generated, was down less than 1% versus the prior period. From an end market perspective, our national security business grew 1% year over year in the second quarter. However, excluding the impact of lower billable expenses, our national security business grew 6% in the quarter. Reflecting strong customer demand. We have significant backlog of funded work to execute on, and have aggressively scaled up our hiring. We continue to see strong demand signals across the portfolio. With our qualified pipeline and national security up more than 20% year over year. Compared to this time last year. Our civil business declined 15% year over year slightly better than we guided to last quarter. This was primarily driven by the full quarter impact of some recompetes that have transitioned to follow on contracts, with smaller size and scope as well as fewer new program starts. Looking ahead for the rest of the year, pressure in the civil business is easing, and we now expect revenue to be flat to slightly down sequentially for the third and fourth quarter. As some of the first half dynamics gradually ease into the second half of the year. Turning to profitability. In the second quarter, we again delivered results above our expectations. Adjusted EBITDA was $313 million at a margin of 11.3%. Up 10 basis points year over year. The performance was driven by another quarter of strong contract execution. Adjusted diluted earnings per share increased 18% year over year, to $1.76. This increase was driven by profit growth, a reduced share count, and a lower tax rate. Adjusted EPS also benefited from a $10 million earn out from the DARPA divestiture. Our tax rate benefited from tax planning updates, for the recent tax law changes. And on cash flows, free cash flow for the second quarter was $263 million. Driven by continued strong collections. From a working capital perspective, days sales outstanding, or DSO was up 10 days year over year to 82 days. As a reminder, we expect our DSO to remain elevated relative to our historical level due to the Defy acquisition. Excluding the impacts of both Defy and the Ultra acquisition, DSOs were slightly down, year over year. Moving to demand and leading indicators. We had solid bookings during the quarter with a book-to-bill of 1.5x. Benefiting from a large classified award in the quarter. Our trailing 12-month book-to-bill was 1.1x, Total backlog at the end of the second quarter was nearly $41 billion up 2% year-over-year. Despite a funding environment that remains choppy, our funded backlog continued to strengthen. Increasing 5% year-over-year, to $5.7 billion. Funding started slowly in the quarter, However, we saw stronger funding activity in September to close out the government fiscal year. And finally, on capital deployment and the balance sheet. We deployed a total of $965 million in the second quarter. Which consisted of $729 million for the Ultra I&C Mission Solutions acquisition inclusive of certain adjustments. $66 million for strategic venture investments, and $170 million in shareholder returns, through quarterly dividends and share repurchase. From a balance sheet we ended the quarter with $334 million of cash on hand, and total liquidity of $1.8 billion. Our balance sheet remains strong, and our robust cash flow generation gives us strategic flexibility to drive investments in the business and opportunistically deploy capital. Now turning to our outlook on Slide 7. For fiscal year 27, we now expect to deliver revenue between $11.3 billion and $11.6 billion implying growth of 1% to 3%. As we enter the second half of the year, we expect an acceleration in our national security portfolio. With mid single digit growth for the full year. In civil, as previously discussed, we see some headwinds in the first half of the year easing into the second half. From a quarterly cadence perspective, we expect civil revenue to be flat to slightly down sequentially for the third and fourth quarter. Implying a low double digit decline for the year. Slightly softer than our initial expectations. Our updated range also reflects the incorporation of Ultra Mission Solutions. We are excited about the acquisition, and we are in the process of integrating Ultra with our broader defense tech business. We are raising the bottom end of our prior adjusted EBITDA guidance to now a revised range of $1.26 billion to $1.29 billion. This implies a step down in margins in the second half. In line with typical second half seasonality and timing of investment spending. We are raising our expected adjusted EPS range meaningfully to a revised range of $6.50 to $6.70. Our EPS guidance incorporates the impact of the CVC gain from the first quarter. The DARPA divestiture earn out, and a lower expected tax rate for the rest of the year. And lastly, we now expect to generate free cash flow between $850 million and $925 million. This range reflects our strong year to date collections a slightly lowered CapEx assumption, and incremental costs and interest expense associated with the Ultra acquisition. To summarize, I am proud of the team's continued strong execution, and their unwavering commitment to delivering critical technologies for our customers. We are investing in our growth vectors, accelerating our transition to outcome based contracts, and as always, driving value for our shareholders. With that, operator, let's open the line for questions.

Thank you so much. Press *1 on your telephone and wait for your name to be announced. To remove yourself, press *1 again. 1 moment for our first question. It comes from Tobey Sommer with Truist. Please proceed.

Thank you. I wanted to ask you, about the customer's propensity to convert work to fixed price and pursue OTAs from the onset to move more quickly. How do you see that shifting your portfolio by contract type and margin over a medium term amount of time?

Hey, Tobey. Good morning. Why do not I start? You know, this is in line with what we have been talking about all along, which is that it is both good for the country and for the department and, frankly, good for Booz Allen. That the move to outcome-based contracting is something we embrace and something we have been pushing for a long time, and it is actually really happening. OTs are a piece of that. We are seeing strong growth in our OT pipeline. But importantly, across really all of our business, Civil got there earlier, but across all of our business, the proportion of our contracts that is going to be either fixed price or outcome based is we project to continue to grow for quite some time. And with that, our ability to change the way we deliver and our ability to grow our profitability, together with the fact that we are productizing a lot of our IP. We are launching things in the market. We are selling differently and the like. And I. You know, when you put that all together, that is part of the story for why we are saying we are on track why we are saying, you know, like, revenue, growth, in national security if you take out the billable expenses, was about 6% last quarter. And profit growth has been strong. Margins have been very strong in the first half, and execution has been great.

Thank you very much.

1 moment for our next question. That comes from Gautam Khanna with TD Securities. Please proceed.

Yeah. Thanks. Good morning. Just curious on the big sequential increase in funded backlog. Which is positive. I assume that was mostly in national security. So if you could just elaborate on where you saw the big increase. And then secondly, how do you think bookings play out over the next couple quarters given what you have in the pipeline?

Yeah. So I can start. Thanks, Gautam. When you look at the back growth that we saw, again, total backlog was up 2% to about $41 billion. Saw good growth in the funded backlog, but even stronger growth in the national security funded backlog, which was up 10%. And so I think that really gives us confidence in the back part of the year for the growth that we expect to see in the national security business. I will let Horacio talk a little bit about the environment around bookings and things like that. But overall, we are generally with what we are seeing from the customers right now and how they are seeing our advanced technologies provide value.

Yeah. Gautam, I would make the following distinction. First of all, I would characterize the demand environment in both national security and, frankly, in civil as strong. And in national security, we have seen you know, as Troy said, a good increase in funded backlog, especially towards the, back end of the quarter. You know, we are now in a continuing resolution. We are still funding, operations out of the base budget. And so you know, how exactly that is going to play out in the next quarter or 2 if something we are watching very closely, but it is embedded in the way we are guiding. And then on the civil side, again, we see strong demand, especially around superintelligence and Agentic and using those tools effectively to code faster. We see huge demand across our portfolio, both commercial and government for cyber. But yet having said that, you know, especially when you look at civil, there are procurements that are continuing to shift to the right. You know, both in terms of when the procurement gets laid out and sometimes the award timing shifts to the right as well. So exactly how bookings are going to play out. Over the next quarter or 2 is a little harder to predict. But overall, you know, I think the trend lines and the positive outlook on demand is what we are focused on.

Thank you.

Our next question comes from Louie Dipalma with William Blair.

Good morning, and happy Friday. Horacio, you described your Velox product line that utilizes Agentic AI for cybersecurity and there continues to be cybersecurity incidents regarding the SI platforms going rogue and the risk of adversaries exploiting the vulnerabilities. And so what has been the adoption of your Velox product suite? And have agencies been incorporating Velox into your existing large cybersecurity programs such as CDM Defend. Thanks.

Sure. Hey, Louie. So I would say the following. First of all, if you look at our Zero Trust platform. Because at the end of the day, while there is a number of things that you need to do to fight SI with SI, Zero trust is a foundational capability because perimeter defense alone is wholly insufficient. Our zero trust work is growing significantly because, it is such a big need. And we have productized some of it, and we are changing the way in which we sell that. Really, not just to the federal government, but brought to a broader range of customers. On the Velox suite, in particular, recognize that, you know, we had a plan to launch the 3 or 4 products in Velox. Over a 2-year period. We made the investment to push a lot of that into private betas a lot sooner. We have gone to market with Guile private beta in record time. But it is still early in those, developments. I think the promise of those products will play out much more strongly over the next couple of years than over the next couple of quarters. The conversations with customers, especially in commercial, but also in federal, have been tremendous. The excitement about Guile as being a 1 of a kind type solution to, where in our lab, even the most advanced models are stymied by Guile. To the tune of 95% of the time. We do not know of anything else that can do that. So we are seeing a, you know, significant upside on top of a cyber business that is already growing very fast. You know, we have been preparing for this. We have been investing on a. On SI. Now for over a decade. As you know, we have a huge cyber presence, at the intersection of those 2, Booz Allen both excels and sees huge opportunity for growth.

Indeed. And, on the other side of the business For civil, Troy, you described the negative impact of smaller scope on certain recompetes And I was wondering what type of scope has been removed or is being removed, and do you believe that process is largely complete, as you guided for generally flat sequential of revenue versus last year, which implies a major step down in this coming December quarter.

Thanks, Louie. I will take that 1. In Civil, when we talk about the recompetes being smaller duration and smaller scope, it is really just how much funding they are actually giving to the same activities rather than actually taking out large sections of work. It has to do, like, for example, if we are doing software development and they are funding a certain number of scrum teams, to push functionality just with the current pressures inside of Civil, they might do that slower. Compared to how they have done that in past years. And we are largely through those transitions. We do not, in terms of recompetes, as you know, a proportion of our business recompetes every year, and this year has been no different. But our recompete win rate has been high, and there are no significant recompetes remaining for the fiscal year. We are seeing tailwinds, you know, around expanding the customer base, and Horacio mentioned our SI Ready data platform and Agentic development, we are seeing a lot of demand for that in financial integrity missions, public safety infrastructure missions, and also healthcare. So there is a strong pipeline, again, that it comes down to conversion. You know, how quick they will do the awards, and that we can ramp up. So it has, as you know, been choppy, but there still is a very strong demand signal for secure agentic software development and data systems.

Excellent. Thanks for discussing those nuances. Kristine, and thanks, everyone.

Thank you.

Thank you.

Our next question comes from John Godyn with Citi. Please proceed.

Hey. Thanks for taking my question. I wanted to follow-up on the trend in fixed price contracting and the impact on margins, kind of bigger picture. For a long time, EBITDA margins have been, let's say, 10% to 11% or so. And obviously, the math of moving more toward fixed price contracts over time, if it is fast enough, kind of introduces the idea of a breakout of margins. And Horacio, I am just curious. Like, for somebody that has a long term view, a multiyear view on this stock, in our minds, should we be thinking about 12%-plus margins, like kind of a new regime of margins? Is that possible the way that you guys see it? Or is it not? And maybe we could just kind of discuss that a little.

You know, thanks for the question. I think all 3 of us were pointing at each other trying to figure out. I think all 3 of us have found something to say on this, but. So I will I will start, and I will pass it over to my colleagues. I will say the following. I. I have been saying for a while that the nature of our business changes, we expect profit to grow faster than revenue and, therefore, margins to expand. Over the next couple of years. You think about it, the move towards outcome based contracting, in some ways for us, it is a bet on ourselves and our ability to deliver excellent quality while continuing to drive the cost curve Again, our investments in SI that go back a decade create a tailwind. There, and we are confident based on what we have already seen in terms of the performance of our fixed-price portfolio versus our cost plus portfolio. That is something that we will realize and materialize But the other thing is we are selling differently. And so, you know, we have productized a lot of our IP some of which is, you know, kind of discrete concrete product we are taking to market like the Velox suite. But a lot of it is reusable technology that sells as technology inside existing programs, Some of the things that Christine was talking about, in terms of digital engineering, agentic data platforms, and the like, I think give us those kinds of opportunities And so I do not think you are gonna see, like, a huge step up in 1 quarter to the next. I think you are gonna see a steady growth. But, certainly, as we are planning the business, as we are executing the business, our goal is to expand margins, for the foreseeable future.

Yeah. John, I will just add a little color there. I think Horacio just teed it up perfectly on the long term trend is very favorable. There will obviously be variations quarter to quarter. Specifically, I called it out in the second half when you look at the margins that we are seeing. I think you do see some favorable benefits of. Towards this fixed price trend. However, there are lower, civil volumes in the second half. There is some timing of investments, and there is normal seasonality. So just be mindful of that for the next few quarters, but I think you are you are thinking about it right from a long term trend standpoint.

And, John, I will make 1 last point that I should have made earlier. We are growing margins while at the same time growing investment in the business. If you think about it, Belox is a bit of a start up inside of Booz Allen, and so right now, you know, you are investing for growth. that is 1 example of several. And yet we can do that at an increased pace, at an accelerated pace while continuing to grow margins.

I think that is fantastic. Appreciate it. And if I could ask 1 for Kristine. Kristine, you mentioned. You had a phrase in the remarks, something like returning to above market growth. And this is not a gotcha question. I am not trying to wordsmith that. But what is the market growth rate that you guys observe? Because you have a business where there are some markets that are growing very quickly and you are leaning into it. Others a lot less so. How do we think about the market growth as you do so that we know what above market is?

Yeah. Thank you for that. And, certainly, it has been our goal to return to where we have been with mid single digit growth year over year. And then even better on the bottom line even than we have in the past. And so, you know, we see the demand signals out there to get to that, and it is really a matter of making it happen. With the conversions and continuing to lean in and build the momentum around our use of our technology and productizing our business and continuing to shift to outcomes based You know, so there are just for what the market is demanding, we have a lot of it. And so if you look across defense tech, cyber, SI, I mean, just pure strength areas for Booz Allen. Great, guys.

Thanks a lot. Thank you.

Our next question is from Sheila Kahyaoglu with Jefferies. Please proceed.

And thank you for the time. I wanted to ask maybe 2 questions on the national security side. You highlighted that ex billables, the growth was actually 6% versus the 1% reported in the second quarter. Maybe can you talk about what acceleration do you see in the second half and to hit the high end of the guidance, it is about mid teens growth. And, you know, how much of that is moving from just funding improving versus Booz-specific priorities that are being funded.

Thanks, Sheila. I think a lot of it has to do with the capabilities that we are bringing to market. I mean, there are there is great demand for our battle management solutions, and that ties into the Ultra acquisition. You know, of activity in space domain awareness, You know, we are seeing a lot of force readiness initiatives, our digital engineering you know, some emerging areas around autonomy and our mission autonomy software, quantum picking up, So I think, in general, both between what we already have backlog for and what the pipeline looks like, which as Horacio said is you know, how that converts may be related to how the budget environment plays out. But what we are telling you in our guide is that we see enough. In the business to continue to grow that strongly and have it strengthen in the second half.

Okay. Got it. And maybe if I could just ask about Ultra. Can you talk about how we should think about that in the second half and just how it is blending into your defense tech portfolio already and contributing?

Yeah. Thanks, Sheila. I will I will take that 1. From a Defense Tech standpoint, look. We are we are very happy with how Ultra is going. We are integrating our DefenseTech business with Ultra, out having conversations with customers and very excited about what these 2 businesses can do, when we bring them together. We do still see Ultra, growing strong top line growth. And then having margins well above 20%, which is what we have talked about. So we continue to see good growth out of that business We rolled that into the guide, which I am sure a lot of people have questions about. And so overall, the national security business is growing, and Ultra's a great part of it.

Especially, just. I will just add to that by saying, you know, the core of what Ultra brings is additional strength to our C3BM portfolio, which is already, growing very strongly, both in terms of traditional contracts and OTAs and new formats and B2B formats and things like that. And they also and that was the primary, goal of the acquisition. But it also brought with it a series of products we believe are going to further enhance our position in autonomy, especially around their platforms. And, because of their encryption business, that meshes really well with some of the things we are doing both in autonomy and in cyber. And so we see really strong, you know, market, opportunity and traction for our defense tech business. In totality, we would like to see it grow double digits. And certainly, Ultra is a significant part of that. And the other thing I will say, you know, having seen us do a number of acquisitions, and I will caveat by saying that this is very early days. From a cultural standpoint, this is 1 of the most compatible cultural integrations I have ever seen. Awesome.

Thank you. Thanks.

Thank you.

Our next question is from Gavin Parsons with UBS. Please proceed.

Thank you. Good morning. Morning. Going back to the question on kind of above market top line growth, I just wanted to think about how we should frame that or build up to that over time as you evolve the model away from kind of that historical headcount that we could use to sort of drive revenue.

So I will I will start, and then I will turn it over to Troy. Know, in my mind, again, if you think about our business, we expect our cyber and our defense tech businesses to be the growth leaders inside Booz Allen You know, those are attractive markets. We have unique positions tremendous demand, and already a track record for above market growth that we expect and intend to expand. And inside of that is where we are making also most of our investments in terms of productizing and bringing IP to market in a different way. So that to me is going to be a core area of strength that will drive a lot of our business, both at the top line and at the bottom line. And then beyond that, SI demand and identifying things both externally and internally create a significant tailwind for the business. That we expect to see play out again, over the next couple of years. So you know, I do not think there is a magical change where, you know, quarter to quarter, you are gonna see huge changes. But I think the way we see it is steady improvement in the top line steady improvement in the bottom line, and the ability to really continue to differentiate Booz Allen through the capabilities we are investing in and we bring.

Got it. And then on the civil side, appreciate the color on the downsize recompetes, but you mentioned the demand environment there strong. So what kind of keeps moving to the right on you guys in this business?

Yeah. Thanks for that. Well, the pipeline itself has been strong. What we do see, and this happens a little bit in national security too, but it happens more recently in civil, Just where they are pushing out the, like, there will be a recompete announced You will see a couple of draft RFPs, you know, etcetera, but then they will push it out further and extend the current contract and decide to do the recompete a little bit later, whether it is ours or somebody else's. And so that is what we are really talking about. Some of the larger bids are just pushing to the right. And then as they push to the right now, they kinda push out of this fiscal year in terms of where you really see the value. But the pipeline itself continues to grow, and we are seeing awards. it is just a little bit choppier than it normally would have been.

Thank you. Thank you.

Our next question comes from Matthew Akers with BNP Paribas.

Hey, good morning, everybody. Thanks for the question. Could you touch on headcount a little bit? You have had pretty steady declines here for a while. It looks like maybe it is starting to stabilize. Are you starting to ramp back up in terms of headcount? And if so, are you finding that you are you are able to find the people that you need for that?

Yeah. Thank you. Absolutely. I mean, we are still focused very strongly on hiring, and this is where it is bifurcated. It was another quarter down a little bit for civil. We added over 300 employees in national security this quarter, and we are rapidly building our technologies, and we will be decoupling growth from headcount. But yes, it is different across the businesses, and we are hiring.

Okay. Thanks. And then, I guess, maybe Troy, just on the balance sheet, after Ultra, just how you are thinking about deleveraging and kind of the capital allocation priorities from here?

Yeah. I would say if you look at the cash flows of the company, very strong. Really good cash flow performance and good collection. So I think that gives us the ability to have a very balanced capital deployment strategy. We have talked, deleveraging while we go through the integration of Ultra here, but that does still allow us to, strategically look at some other opportunities. But we will still continue to pay the dividend and do modest share repurchase So continue to have a very balanced approach is the way I would think about it.

Okay. Thank you. Thanks.

Thank you.

Our next question is from Scott Mikus with Melius Research. Please proceed.

Good morning, Horacio and Kristine. Just in the past, we would think about the organic growth algorithm kind of as a function of headcount growth, wage growth, and book to bill. Just going back to some of the earlier questions on the call about the shift to fixed price and the outcome based contracting. How relevant is that old growth algorithm today and what is the strategy going forward to try and decouple your top line growth from the overall budget cycle or at least make it more resilient when there is potentially administration changes. And changes in priorities.

I will take that 1 here. I think when you think about the algorithm, that you are used to, it is we are, I would say, migrating away from that. Christine talked about the transformation and the technologies that we are building. As those take hold, especially in the cyber business as we are productizing, and the defense tech hardware really starts taking off in that business and the solution that we are bringing to market, you are gonna see further decoupling over time. Again, I do not think that, this is gonna be a 1 quarter phenomenon. Or even a 1 year phenomenon. This is a gradual journey that we are on. I think we are really bringing these advanced technologies to bear that allows for long term growth and margin expansion. And so I think you will see a trend where you see good top line growth and you could see faster bottom line growth. As the products and the solutions that we are bringing to customers have more value. And then we are really using our SI capabilities to bring those enabled technologies to bear, allowing us to more efficiently deliver for customers. So it is it is a trend that will continue over time. We have, good profitability that allows us to invest in these core areas. So that decoupling will continue over time. But it. It will be a gradual effort year in and year out.

Alright. And then 1 other housekeeping item, Troy. What were the acquired sales in the quarter and contemplated in the guide for the Ultra acquisition?

The acquired The acquired sales from the Ultra acquisition in the quarter and in the guide. Yeah. I would say it is immaterial. I mean, look. We rolled it in. There was there was modest impacts to the guide from Ultra. We saw some puts and takes on the revenue side. When I think about Ultra, I would say that offset the civil weakness that we saw. And that allowed us to really hold the guide across the board.

Thank you. Thank you.

Our next question is from Seth Seifman with JPMorgan. Please proceed.

Thanks very much. Good morning. I guess, first, off, if you can just talk about the orders in the quarter. Should we think about the same type of bifurcation in terms of the order growth? It seems like the orders were probably down low double digits year on year. Should we think about were the civil orders down significantly more than that And, and that there is that is kind of factoring into the change in the outlook?

Yeah. I think that is generally right. I mean, I think we are continuing to see good strength in the national security business. Again, national security funded backlog was up nearly 10%. The national pipeline is up more than 20%. So that. that is really where you are seeing strength. Christine highlighted, some of the insights into the civil business. I think that some of those pressures are easing. And, I think that is reflected in the new updated guide for civil where we are talking now about flat to slightly down just given some of the, the macro environments that we see in the civil space. So I think it continues to be bifurcated with national security being the strength of the, the company and the business right now.

Okay. Okay. Excellent. And then, a little bit bigger picture, Horacio, and I apologize. I know this sounds like a super basic question. But just in terms of cyber like, I do not think anyone doubts that, you know, Booz Allen has some very superior cyber capabilities and also that there is huge demand for cybersecurity right now. But in terms of helping people understand, if you are an investor and you are looking at Booz and thinking about exposure to cyber, you know, helping to dimensionalize you know, what that means in the portfolio right now, and kind of where Booz Allen fits into the whole cyber equation. there is a number of businesses in cyber, you know, different stocks who are covered by software analysts who have very different, you know, growth structures and margin structures. And so when you think, okay. You know, cybersecurity is an important trend and Booz Allen has a lot to contribute, but to make sure that you know, people's expectations are properly capitalized or properly set about what that could mean for the financial performance of Booz Allen. How should they think about that?

it is it is a great question. So let me describe our cyber business as essentially our most rapidly transforming business across the portfolio. If you go back a couple of years, our cyber business was largely a cost plus business, largely labor based. It cover the spectrum from full spectrum operations. To you know, to cyber defense across the entirety of the federal government. And a commercial business, that was coming along, but, you know, that was not a large portion of our growth opportunity. If you look at our cyber business now and you take the snapshot, now, this is a business that is already growing significantly both at the top line and at the bottom line because it is really fundamentally changing to be a business that is a technology first business and solutions first business, if you will. If you look at our large, for example, Zero Trust platform, we were originally, you know, an integrator, and then we were. We were building tech that was in the middle, you know, was sort of closing gaps between the technologies we are integrating. If you look at our Zero Trust business now, we are really an innovator, building. We are still building on best commercial technology in an open architecture where we can swap out technologies as they get better and worse, relative to each other. But, also, we are building on top of that a set of tools that allow us to almost sell that as a SKU just about. And so that is a fundamental, change to the way we can actually execute and scale that business beyond our federal customers because it is very hard to sell it to anybody else the way it was sold to federal customers. And that is a big part of our cyber business. And in addition to that, we are seeing all across our cyber portfolio significant opportunities to innovate from, again, like I said, from full spectrum operations to the work that we do with, with the commercial markets, where Velox is getting traction, where Guile is. As part of that is getting traction, and where customers are looking to us to really help them close the gaps that they have right now, we all have -- including our own infrastructure, when it comes to defending against these, SI-powered cyber attacks. So, so we see huge growth, huge opportunity in a business that is fundamentally transforming, that at 1 level is an unrecognized world leader in cyber. Part of what we need to do over the coming quarters and years is to be able to dimensionalize it better in a way that you all can put a value on, and, you know, understand its value better. That is in the cards. That is part of what we are working on. But, you know, again, part of the reason. Part of the power of who is Allen is that while we build these amazing businesses, we integrate them with each other so that they can actually create internal synergy. So I will I will give you a great example. We are using what we know about cyber, both you know, on both sides of the ball. To really strengthen the products that we are building in our defense tech portfolio. And why is that important? Because if you are going to play at the edge, your products are going to get attacked. By every adversary even before they leave the factory floor. And so we are bringing all of that know how to ensure that our products can be trusted at the edge, by all of our customers And in some cases, when you are dealing, for example, with EW, they. Our DTG portfolio becomes, the vehicle by which some of these, cyber products go to market. So I. I am not, you know, I am not sure if I am fully answering your question the way you would want it answered, but I. This is why this is an area we see so much opportunity.

Yeah. that is very helpful. Thank you.

Thank you.

Our next question is from Noah Poponak with Goldman Sachs. Please proceed.

Hey. Good morning, everyone. Morning. Morning. Troy, can you quantify what is the organic revenue growth range that is in your new full year guidance versus what that was previously?

Yeah. Would say I can give you a framework here and then kinda let you triangulate and get to the answer here. But, obviously, we changed the civil guide from down high single digits to now down flat to slightly down sequentially. In the third and the fourth quarter. So you can kinda think about those changes And we said that Ultra largely offsets the civil weakness And then so we are still seeing growth in the national security and really no change. So those are really kind of the puts and takes to the guide, and that should help kinda frame Ultra a little bit around how much is rolled into the guide. But, again, it is it is not material. To the overall picture of what we are guiding to for the year. Got it. So in the absolute dollar range, same midpoint, and 20%, we see a lot of core synergies and capabilities between our defense tech business and their business. We are bringing these 2 businesses together. So, we kind of view these as an integrated defense tech business. So that is why we are not sitting here kind of breaking out the numbers and kind of getting in the details. But it is a very good business that we bought, and we are very comfortable with the growth profile, the margin profile. As Horacio said, the culture is fantastic, fitting in well with us, and we like the technologies of what we see. So yeah, I think it is it is good.

It helps the business long term, and we are very optimistic about this. And as you continue to evaluate M&A, is it pretty opportunity rich just given kinda the raw number of companies out there and then, you know, what is happened with valuations, I guess, in the defense tech vertical and you know, is there a world or a scenario where we see you make a flurry of acquisitions, especially as you try to strategically pivot the business a bit. Or you know, will it not be like that? Will it be slower and much more selective, and you will wanna buy back stock as well?

I would say we continue to maintain a very balanced approach to the capital deployment strategy. I would say as it relates to M&A, we are being very methodical and strategic with our investments around these growth verticals. In cyber and defense tech, we are investing internally. But then we are also being selective with m and a opportunities is the way I would probably describe the outlook probably better than, than just commenting that there is a flurry. So we will we will be very strategic and methodical about it.

Great. Just last 1, Troy. Just margins for the rest of the year, do the moving pieces create any substantial difference Q3 to Q4, or is it pretty level loaded for the rest of the year?

Yeah. I mean, there are puts and takes. I do not wanna get into quarter by quarter. I think directionally, you will still continue to see, civil volumes as those come down relative to the first half. That will impact margins. The investment is relatively balanced throughout the year. Little more seasonality, but quarter to quarter, not trying to guide 1 way or the other, third versus the fourth. But those are the puts and takes for the second half.

Okay. Thanks a lot. Thanks.

Thank you.

Our next question is from Jonathan Siegmann with Stifel.

Maybe a big picture for you, Horacio. You manage the company through many election cycles. Not, you know, with 1 10 days from now just not asking you to call the election or estimate the budget, but just maybe comment on what changes may happen or not happen after past midterm elections. And then specifically, just on this positive momentum on the outcome based contracting, maybe comment on how bipartisan you think support is for some of those reforms, would be appreciated. Thank you.

Sure. I will. Maybe I will start with the second part and then try and answer your first question. I. You know, when you look at the NDAA and the support for the NDAA, which has been consistently pushing towards outcome based, I think that the. In general, these are bipartisan moves that I hope will stand the test of time because you know, again, going back to basics, this is not about who prefers what. This is about the fact that technology is evolving at a speed and with a scale that cannot simply be bought in the way things used to be bought in the past. To set up this very long cost plus contract where you are trying to define every aspect on day 1 and making any change takes forever. Does not work. And I think frankly, creating a stronger incentive for the defense industrial base, whereas the established players or the new players to innovate on a more constant and rapid basis. Is good for the country, something we have been advocating and something I believe based on all my discussions that is going to continue. You know, could it change in tenor a little bit and some of the dynamics and how it is actually done? It probably has to because things evolve over time. And, you know, as these new processes mature. They are gonna get better, and then there is gonna be some learning there. But I expect that. I hope that is a longer term trend than just you know, 1 congress. And then, you know, going back to the first question, I think, you know, we regardless of the outcome, of the election, there is always. You know, 1 of the key questions is there going to be a budget this year, and when is the budget going to be passed? And I think we can be in the business of predicting that -- us or anyone, right? I mean, we have seen it where in the waning months of a congress, they pass a budget. I have seen it where in the waning months of a congress, they leave it to the next congress to do it. And what we have tried to do is 2 things. First of all, we try to incorporate a variety of scenarios in our guide. But more importantly, we are focused on execution. We are focused on what we can control. And we are focused on driving the transformation and investing for future growth. Thank you for the comments.

Sure.

Thank you. And this will conclude our q and a session for today. I will turn the call back to Horacio D. Rozanski for final comments.

Thank you. And thank you all for your questions and for being with us today. You know, we spent a lot of time this morning, talking about exceptional execution, the progress we are making on our products, our technologies, and how we feel about the opportunities ahead. I would like to take a moment at the end of the call to recognize the incredible people that actually make all of this happen. You know, the people of Booz Allen are among the most talented and dedicated professionals anywhere in the world. They really do bring their best every day not just because they love what they do, but also because they believe deeply in the missions that we serve, and in making our nation better. And this sense of purpose is what makes Booz Allen special and it is what makes me grateful to come to work with such an incredible group of colleagues day in and day out. So to conclude and to all my Booz Allen colleagues, I just want to say thank you. Thank you for your passion, for your dedication, and for everything you do to improve both our company and our country. You fuel my optimism about the future. And with that, thanks again for joining us. And have a great day.

Thank you all for participating in today's conference. You may now disconnect.