Booz Allen Hamilton Holding Corporation (BAH) Earnings Call Transcript & Summary

Good morning. I'm Louie DiPalma. I cover aerospace and defense on William Blair's equity research team. This is day 3 of William Blair's 41st Annual Growth Stock conference. We are pleased to be hosting a 30-minute fireside chat with Booz Allen. Joining me today are CFO, Lloyd Howell. Lloyd, thank you for joining me. And audience members can submit a question via the Zoom interface, and I am required to inform the audience that a complete list of research disclosures and potential conflicts of interest are available on williamblair.com. Booz Allen previously presented at our conference way back in 2011, 2012, 2013 and again last year. So Lloyd, welcome back for another year.

Thank you, Louie. It's great to be with you, and thank you to you and William Blair for hosting the conference this year.

Excellent. And starting off, Lloyd, right before earnings, we picked up that Booz Allen won a fairly large $1 billion contract renewal for your work with the VA. The VA is one of your large customers. It was for a program of the benefits platform. I didn't ask about this on your earnings call just because I thought somebody else would ask about it. But can you discuss what type of work that you are doing with the VA benefit platform, what type of technologies, how it might evolve and just the VA in general as a customer of yours?

Yes. I mean, over the years, we have been supporting the VA. We're very proud of the work that we do. And it's on a variety of programs that assist, not only administratively, but help our veterans directly. And given the reference to the award, we're very excited about the award. And it's the continuation of, in essence, the modernization of many of the VA's IT systems, architectures. And we're bringing to bear cybersecurity support, system software development, the list goes on and on. And it really stems from our good understanding of the mission of the VA, its programs and how best to facilitate that with the introduction of technology and the advancements that all our federal clients want to take advantage of, but specifically the VA in this case.

Great. And another recent announcement, I believe it was yesterday, you announced that you won a contract for the Department of Defense, deploying your Advana program as it relates to the data analytics. And your announcement said, this platform is used across the DOD by over 42 organizations. Can you provide, I guess, more detail on the development and the evolution of that Advana program?

Yes. I mean, Advana as well as other recent awards, really tied to what we've been saying over the years about moving more and more in the technology solution space, in the case of Advana, which, to your point, integrates hundreds of business systems across DOD. And in essence, it's making data available more widely, both to address adversaries as well as just the administrative needs of the department. And these are examples of where we want to be, where we're bringing to bear our expertise and data analytics, system software development and the integration of all these to include change management. We're very proud of the award. It's consistent with what we want to do and how we've been transforming over the past 7, 8 years. And it's nice to see some of these procurements come our way.

And so you announced this data analytics award, I believe it was yesterday. And 2 days ago, you announced a partnership with Databricks, I believe, as it relates to an open data platform, is this partnership related to Advana? Or is it something -- is this open data platform completely different.

I mean we see it as a consistent partnership to where we wanted to build partnerships with vendors more broadly. So if you go back to our Vision 2020 strategy under the umbrella of innovation, part of that was to build more broadly partnerships that would be not only contribute to our thought leadership, but also supporting our clients in the best way. So related but not necessarily direct to the award announcement, but definitely contributing to other opportunities that we see on the horizon. And then also benefiting not only our workforce in terms of their advancement in development, but also supporting our clients. And so we have been investing in data analytics for quite some time, and these partnerships are a reflection of that.

Great. And I guess for Advana and even for the Databricks partnership, the open data platform, are these platforms that your software developers are able to use to bid on other projects within the DOD, whether it's the Army -- or because the Army has data analytics projects that -- and they're trying to modernize in the Air Force and all across. And so are you able to use these same platforms such that for these new initiatives that the Navy or the Army doesn't have to start from scratch?

Yes, it is. It depends. And there are all sorts of sensitivities around what are the mission requirements and classification and what's the operational environment. But anything that's joint or DOD typically does allow another entity -- gives them a starting point. But what we have found over the years is as you introduce the unique requirements, you then begin to make adjustments to that starting point. So it definitely is a part of our intellectual capital, thought leadership. It's definitely a starting point for us and our clients. But again, I think why many of our clients turn to us is that we do have a good understanding of their mission and what they're trying to do. So it's never one-for-one, if you will, just sort of cut and paste. There's always a change that's taken into account.

Got you. Because, also, there was a third announcement that was several months ago that related to your investment for the Rainmaker program. I believe that was for the Army. And you basically just answered how each program is somewhat unique. But from a software perspective, I was just interested. And yes, if you've developed like a really impressive software platform for one agency and then could you use that software platform and perhaps command a higher-margin by recycling it for the second agency and then the third agency? And I guess can you provide more color in terms of the Rainmaker program as well? And how that's a little different from the other 2?

Yes, a little bit. And again, it's still in the same ballpark in terms of sharing data. So this lets combat networks share data to address adversaries. As it does pertain to the software end of the spectrum, this is also consistent with the -- where we've been moving in terms of our capabilities. So SaaS opportunities are definitely a part of our portfolio of capabilities and also a part of the talent that we're looking to recruit to Booz Allen. In terms of reuse, in some cases, the answer is yes. But I could point you back to my previous comment, where it still has to be tailored and taken into account the unique requirements of that client. And so obviously, when we do bid on new opportunities as a part of our corporate qualifications, they want to see that we've done similar work in the past. And that we do have the resources and the talent to deliver on that particular opportunity. And I think given the awards that you've made reference to, we're very pleased with how that track record is building. And that also ties into our most recent acquisition of Liberty, which has low-code, no-code development as a part of their capability, which we see as also being -- increasing in demand in the federal market.

Awesome. And yes, on the subject of Liberty, can you discuss, I guess, why the time is right for you to make this acquisition from the perspective that you discussed on your call on how this is the biggest acquisition in Booz Allen's history? So why are you being acquisitive now versus over the past decade?

Yes. I mean I think in the beginning through the end of last fiscal year at the beginning of the end of FY '20 and the beginning of FY '21, Horacio and I began to state that given the strength of our balance sheet, we did want to pursue where it made sense inorganic opportunities, and we would be in a good position to do so given our cash generation capabilities and track record. And since that time, we have been building up our pipeline of opportunities, both small and large. And Liberty, in essence, was the first one to emerge. So it's really a function of timing. And the fact that in our discussions with Liberty, we mutually agreed that it made sense to move out. So again, to us, it wasn't an overnight dynamic. We, certainly, were preparing ourselves, and we were capitalized in a way that it made sense. And where we saw Liberty having the capabilities that we had already begun to build on our own, this is really going to be an accelerator to that. And so a combination of their culture, our culture, the integration, the values and their capability strength made a lot of sense to us.

Nice. And I guess the theme for my previous line of questioning and your answers were that -- like for all these different data analytics projects that they're all different in that the customer requires like a very high degree of customization. And so as it relates to Liberty, I guess, their big skill set that you highlighted was like the low code, no-code development and the developers. And so are you able to like use like these employees that have traditionally just served the VA or other health care agencies? Are you able to redeploy these software developers to help with your work on DOD projects and other agencies?

Yes. Over time, for sure. Certainly, in the near term, Liberty and our broader federal health business has plenty of opportunity right in front of them. Liberty brings a $2 billion ceiling -- or contract ceiling that we certainly want to sell out. And so that will contribute to the revenue synergies that we talked about on the call. But beyond that, I think it's fair to say across the federal market, many of the clients would move away from waterfall development. Some argue that even agile development is sort of on its last lap. And so what's emerging is this low-code, no-code development with the assumption that things would be sped up and allow for limited resources to get utilized more efficiently going forward. And so we want to be in that space, and Liberty and its people and it's talent will facilitate that. The other thing to note is that they have a tremendous operation in Melbourne, Florida where we expect many of our folks to move through in terms of development in their own right, so that we can retrain, repurpose our broader workforce as time goes on.

Yes. That is -- it's good to know there's a lot happening in Florida as it relates to the space industry.

Yes.

For -- I guess, as it relates to Liberty and your broader M&A strategy, you just said that 3 months ago and 6 months ago you made to investors that like you are more interested in M&A for strategic technologies. Should we also expect more deals similar to what you did with Tracepoint in which you take like a minority stake in companies? Or are you looking for full acquisitions?

Yes. I think we've got a pretty diverse approach to how we're thinking about inorganic activity. So at one end of the spectrum, you've got a deal like Liberty. The other end, you've got a Tracepoint where it also addresses a capability need, a market demand need and then, over time, gives us an opportunity to do an outright acquisition as time goes forward. So our pipeline is building with all sorts of interesting ways to get at the inorganic side of the equation. And we're trying to be as creative, if you will, without to do those types of transactions, and at the same time, maintain our organic growth leadership and always listening to what our clients are really in need of. So it's a little bit of everything, and it's still got an emphasis on capability. And even though Liberty is probably on the larger side of a tuck-in, but it's still, in essence, an in-demand capability will accelerate the strategic directions that we're headed in and we feel really good about it.

Great. And I guess pro forma for the Liberty deal, like how large is Booz Allen's like health care IT service portfolio now?

Our health care business is at or around $2 billion. It's been on a tremendous growth trajectory for quite some time. And if Kristine Martin Anderson were on this call, she could go into great detail about the puts and takes and how we've been able to do it. But I think at the end of the day, it still has had an emphasis on modernizing many of the agencies and departments that make up HHS. And so we're increasingly working on really cool and interesting mission-tied projects. And I think that has also contributed to the rate of growth that we've seen.

Great. And should investors view the Liberty deal, I guess, as a reflection of how Booz Allen broadly views the budget -- the Biden budget and where dollars are flowing for that budget? Or do you view like IT and cybersecurity and these data analytics as still having the ability to grow at fast rates even in a more austere budget environment.

Yes. The Liberty deal is not a comment on the overall budget or even defense for that matter. It was really a function of us looking at a capability area that we think is going to be in great demand or increasing demand. And having some insight into Liberty market dynamics, it just made sense from that perspective. Pre-pandemic, I think the prevailing thought was that there would be a flattening to the budget overall and maybe defense specifically. And Booz Allen would have subscribed to that. Hard to say where that inflection point will be. But even in a flat budget environment, a lot of the projects that we're shaping, pursuing, we feel, are still a priority to many of our DOD and intel-related clients. So in that sense, we feel that these programs will still get the resources that they need and if the budget is flat, and we are positioning ourselves against those areas.

And one of those, I guess, areas aside from -- like we went over data analytics and low-code, no-code, on prior earnings calls and last year, like the center stage and the focus was on your work with artificial intelligence and the joint artificial intelligence center. Can you discuss some of the projects that you are doing with the JAIC? And I guess, your high-level expectations for how like AI should be growing under the Biden administration?

Yes. A little bit. I think it's fair to say within the JAIC effort, there are tons of tasks that are underway, all at different sort of maturation point. So for some clients, it's really what is this AI thing? How do I think about applying it to my particular program or service? And what skills do I need to have on the government side in order to do so? In other cases, it's much more down the road in terms of addressing a specific mission requirement and applying AI in a way that takes advantage of accuracy, consistency and sort of repurposes some government resources to other things so that you don't have the human touch as involved as it is today. And we're very pleased and excited about -- it's still in the early side of that particular program and what it may lead to over the years. I'd say, in other parts of the federal government, growing interest in AI and how it could be applied to their particular situation, whether it's civilian, Intel or defense, and so we're working with those clients to connect them to one another as well as to compete for those opportunities as well.

Right. And I think it was in the fall of 2019, Horacio did a presentation with the JAIC as it -- related to AI. And one of the topics was project Maven. And the use of, I think, drone imagery and how -- like the purpose of the JAIC and AI was to help the intelligence analysts like go through thousands and thousands and thousands of hours of drone footage and to analyze it better and to use machine learning and that. And so like earlier, we were talking about all of your data analytics initiatives as it related to ISR, I think, with project Rainmaker and your Advana and your Databricks partnership. Is there like a convergence between like this joint artificial intelligence center and also your data analytics platforms? As well, should investors view those as like very interrelated?

I mean over time, I think the main message I would offer is integration and convergence is happening. There are probably folks who would like for it to happen quicker. But given the complexity and the uniqueness of many of the government, the agencies and their missions, it will just take time to work through that. But on the horizon, there's 5G, which in and of itself is a forcing function in terms of bringing AI, cyber, all sorts of things together and doing it quickly. So the technology in and of itself is driving the convergence and the integration. And we want to position ourselves as being a provider of that support. And with like JAIC, Rainmaker, Advana, we feel it positions us well to be credible to compete for future opportunities.

Got you. And last year at this conference, we discussed Palantir. And Palantir's market value has tripled. And in addition to Palantir, there have been several other, what I would refer to as like West Coast, Silicon Valley-type like technology companies that have seen their valuation soar with SpaceX, and then there's Anduril. And these companies are all generally like product companies, whereas you are a services company and expertise company that works as a liaison between commercial entities and the end customer. But we've also seen, I guess, with Microsoft like being involved in like the IVAS project in which, many years ago, that may have gone to another competitor such as L3Harris, for example. And I'm just wondering, from a high level, do you view these technology companies as a competitive threat? Or is the message still the same from last year in that they're a great partner in most instances, and in certain instances, yes, they are competitive?

Yes. I mean, I think the bottom line message is we still see these companies as great partnering opportunities and pretty much everyone having a role to play. There's no doubt that what once was sort of a hardware traditional emphasis is certainly moving more to software and in a SaaS environment. And we are positioning ourselves to be an enabler of that and a disruptor to some degree. So I think it's too early to say, okay, Booz Allen is going to hard right into products. I don't see that happening, but I can certainly see the creation of solutions that will have some repeatability use, back to your earlier questions. And I think we will be a credible provider of that. And we're also a good partner for many of these companies given our history with our clients and our insight and understanding of their requirement. So we'll see. I mean it's certainly a marathon, and we always take new market entrants seriously. So we'll evaluate it on a case-by-case basis and make the right call for the benefit of our clients.

But ultimately, you don't view like the data analytics space as a winner take all. But obviously, we went over how you won 3 or 4 different fairly large data analytics contracts just in the past few months. And it would seem that the DOD wants and is going to continue to use many different types of systems. But you kept on stressing in your answers over and over again that there's just a need for customization and how this customer has unique needs. And so...

Yes. I mean I don't see a winner take all. The federal government, historically, has always fostered competition. I think they see that as a way of getting the best out of the private sector in terms of thought leadership, recommendations, solutions, so on and so forth. So from our vantage point, there will always be robust enough market opportunities to do well and to grow. And at the same time, where you have complex programs, the government has always encouraged partnering -- in partnerships because they have not seen any one company having all the answers to all the needs that they're trying to meet. So we'll continue to be a good partner. If you look at our history, we really refer to one another as competimates because sometimes you're competing and other times you're partnering. So we would expect that dynamic to continue. And as these newer market entrants come into the space, we'll see how it goes.

Awesome. Thank you, Lloyd. That is all the time we had. That was great to go into a more deeper dive on your data analytics initiatives and the Liberty acquisition. But if there are any follow-up questions, feel free to contact either me or Rubun, Booz Allen's, Head of Investor Relations.

You bet.

Yes. Lloyd, look, I hope you enjoy the rest of the conference. Take care.

We'll do it. Thank you, Louie, and thank you, William Blair.

Thanks.