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

Okay. Fantastic. We're going to get rolling here, folks. Good morning, and welcome to Day 2 of Laguna. My name is Matt Sharpe. I am Morgan Stanley's government services analyst. And before I get rolling here, I do have to read a very quick disclosure. So for important disclosures, please see the Morgan Stanley Research Disclosures website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to a Morgan Stanley representative. With that, it's my pleasure to host Booz Allen Hamilton today; CFO, Lloyd Howell, and incoming CFO, Matt Calderone. Gentlemen, welcome; and thanks so much for joining me.

Thanks for having us.

Of course. Of course. And of course, congratulations to you both, some big news out of the company last night. Lloyd will be retiring after, I think, his 34 years with the firm. That's a heck of a run, and you've done a spectacular job. And Matt, I think you've been with the firm 22 years or so and most recently, as Chief Strategy Officer. And so I think you're a natural fit to succeed. You've got some big shoes to fill here, but I think you're up for the challenge. So with that, I know you both want to make some introductory remarks, so I'll hand it over to you.

Thank you, Matt, and thank you, Morgan Stanley. I'm going to break from tradition a little bit to address you all on a personal note. Yes, after 34 years, 6 years in the role as CFO, I've made the decision to retire at the end of the calendar year. And it's been a great career, one that I probably didn't think would have me at Booz Allen for as long as it's been, but time flies when you're having fun. At the same time, the company and our finance team is going to be in great hands with Matt Calderone. He and I have worked together decades in a variety of different transformational initiatives that the firm has had. He predates me in being in our financial team having led FP&A for a bit as well. And so given Matt's introduction about -- my Matt, we couldn't be in better hands with having Matt Calderone become our next CFO. And with that, I'm going to turn it over to Matt.

Yes. Thanks, Lloyd, and thank you. And you've been a mentor, a friend, a peer, a collaborator for, you said, 2 decades, going way back.

Way back.

Way back. And as you said -- plus, you prepositioned me before you took over in finance, and I really enjoyed -- I have enjoyed building the finance team and really a lot of our financial strategy together and look forward to seeing what we can do to build on your legacy. But as you said, Matt, very big shoes to fill.

Absolutely. Well, like I said, I'm sure you're up to the challenge. With that, why don't we just jump into a couple of questions about the transition here. Maybe one for Lloyd first. I think it's important to ask maybe what precipitated the move? And why now? Why this timing?

Yes. No, a very understandable question and probably a longer-winded answer, first starting on the personal side. As I've been thinking about my journey and the things I've been able to do at Booz Allen over the multiple decades, there's not much more that I can come up with that I really want to get at. And that's not meant to sound negative. There's always things to work on. But the things I've been able to get involved in that predate even being the CFO have been incredible, so less in front of me than behind me. Number two are emerging opportunities that I'm interested in, one of which was announced publicly earlier in the week. I'll be joining General Electric's Healthcare Board. I already sit on Moody's Board. And as many of you can appreciate, as a sitting CFO of a company, I can only be on one. So that was an input to the timing of the decision. But outside of that, interested in a variety of community things that I'd like to do and have the time to do. Academic, academia is part of that and then probably a little bit more financial traditional stuff going forward. But externally and personally, those were contributing to the decision. And then internally, were we ready, was I ready, did we feel, Horacio and I, was the time? And the answer was yes, starting with we had a natural successor to me in Matt Calderone. There's no air gap between how Matt and I think about things and how we go about executing things. Below or beneath Matt is a great second team that, in many ways, Matt and I have put together, both sourcing and promoting and positioning. So we feel really good about the strength of our corporate team. And then the third is we're at the early stages of our corporate strategy called VoLT and our long-term guidance. And as I thought about timing, if too much more time had gone by, I would have felt compelled, obligated to see it through. So now at sort of the early stages is a natural inflection point to kind of go on into the next chapter. So again, a mixture of internal and external. Yes, I'm officially retiring from Booz Allen. Doesn't mean from life and whatnot. I won't continue to work on my golf game too much. But yes, I think I'm just at a point now where there are some other things I'd like to do and now is the right time.

Fantastic. And then maybe one for Matt here. As you thought about your career, I'm sure you've gamed out various paths you might take. When did you become interested in the CFO role and working towards that, something you'd like to do?

Interesting. When did I become interested in the CFO role? I'll peg it off, I think, Lloyd, some of our experience together. As you mentioned, Horacio prepositioned me in finance probably about 6 months before you took over from Kevin, and then you and I really built the finance team and our processes and our strategy together probably 2 years into that. If I recall, you and I had a conversation where I said I think I got this. And I can do this job and I like it. I like the team. And that actually spurred a couple of things. One was you having faith in me to really run the internal operations of the finance team and the operations of the Booz Allen business. So I drove the performance cycle working for Lloyd for probably 2 or 3 years after that, up until Horacio asked me to take the Chief Strategy Officer job. And it was great. It allowed you to focus, I think, externally and on broader leadership of the firm with Horacio. So I don't know when that puts it, maybe 2018. And then been an ongoing conversation with Lloyd and Horacio, and here we are.

Here we are. Matt, maybe just a follow-up for you. As you sit here today and you look at the finance organization, are there any changes that you're thinking about either for finance as an organization or the firm more broadly? How are you thinking about things?

Yes. The short answer to that is no, in the short one and for 2 reasons. One, as Lloyd said, we've done a lot of this in partnership, both when I was in the finance team and from my post as the Chief Strategy Officer. And even today, I pulled a lot of the responsibilities for strategic finance with me, even though the team is still set in finance. And the second is I believe in it. I think we're on a good path. The longer answer is, of course, because the firm is changing. And as I think about the firm and its strategy, the couple of elements that we're going to require the finance team to adjust. One, we're bigger, right? We're a $9 billion company with growth aspirations. And I think you've seen with Kristine Martin Anderson's appointment as COO, that's one manifestation of what we need to do to scale. There are others to come. That's going to be a lot of a sort of inside baseball probably. But certainly, there are things that we need to do from a business model perspective to allow us to continue to scale and to grow. And we're going to have to both reorganize or adapt the finance team to support that and the finance team enables that. And the second or probably 2 more, 1 is we aspire to be more technical and increase the technical content of our work and our ability to bring technology to mission, and that has natural implications for not just our externally reported financial numbers but a lot of the internal operations of the finance team and the kind of talent that we need and support we need to give our business partners. And the last -- and this isn't a change from our publicly stated strategy, but we've said that we want M&A to be more, I would say, continuous accelerant to organic growth. And we've been very much on that journey, as you know. But as we routinize some of that and we get better at not just doing M&A but building M&A into a lot of our financial planning and our communications externally, there's going to be some impact there. But I would say all 3 of those are natural evolutions of the path that the finance team is already on.

Of course. Of course. Maybe we'll just take a step back here and sort of thinking about the firm more broadly now that we've talked a little bit about the transition and how the 2 of you were seeing things. And I wanted to ask on the business and either of you feel free to jump in with these questions, but on the business, how would you describe Booz' core capabilities, the business model? What makes Booz different? I think that us on Wall Street at times are guilty of sort of bundling off services companies together and not appreciate the nuance.

Yes. It's hard not to sound biased in my response after 34 years and on the cusp of retirement. But I think we're unique for several reasons. One is if you look at our tenure in this market, we've been around for about 90 years just in the federal space. Going back to World War II, advising the then Secretary of the Navy at that time and then essentially growing up and being side by side with many of the federal agencies, which creates a natural institution and an institution relationship and intimacy. So even for me personally, at a very early part of my career, my clients who were then captains then becoming flag officers and no matter what role I was in, just sort of on speed dial to answer questions. And that is then multiplied. Matt's got some of the same relationships, and you then apply that across the institution. That's one of the first differentiators. Number two is we have a history of reevaluating and changing ourselves every 5 to 7 years. And I think a large part of why we, up to this point, have never been acquisitive is we've been changing ourselves so much that we haven't felt the need and then as a result, developed and became the organic leader in the space, so not even really thinking that we needed to just over long periods of time. But that sort of DNA of looking at ourselves, challenging whether this is the right strategy, making tweaks, sometimes more dramatic than others is part of who we are. And I think that's kept us relevant and current. And then it's the type of work we want to do and the people that provide that support. So we have systematically been moving more and more into technical, more technical, solution-oriented markets and capabilities. We have transformed our workforce to be consistent with that. And quite frankly, our clients look to us for honest feedback, not just to chase a contract, to chase a contract. And I think that has branded us in a certain light that's a bit different than our competimates. And then lastly, I think our people and how they experience the firm, which is really as our core values, and then you can have a career at Booz Allen, maybe not as long as Matt and Lloyd, but you can have a lengthy career at Booz Allen, and it's not dependent upon a contract or anything like that. And I think all of that goes into the secret sauce and contributes to why we're a little bit different.

And obviously, with the positioning comes some strong growth, and we saw some towards the tail end of last fiscal year and into the first quarter of this building off of that momentum obviously. With that, you're also counting a bit of a wider guidance range this year than you typically have what you reiterated last quarter. As you sit here today and look out over the balance of the fiscal year, where might there be risks and opportunities to that range? What needs to happen in the environment in order to get you comfortable with narrowing it up and down?

Sure, I'll start, and I'm sure Matt will want to jump in. As Horacio and I gave guidance at the beginning of the year, it was really with an expectation that we had clear line of sight in the first half. We got a little bit murkier in the back half. We had a budget, have a budget, full steam ahead in terms of winning work, positioning for new opportunities, all that playing out. We also said, hey, look, we've got to improve upon adding to our workforce and we've been steadily building that momentum as well. At the same time, we said, look, there are some variables out there that we historically always identify but we got the magnitude of the impact wrong. The first thing that we're going to come up on midterm elections. And there's all sorts of theories and scenarios, but any way you look at it, I think most people, including ourselves, are expecting some changes, which could result in a different budget scenario. So if the House and Senate were to flip and we ended up in a more contentious friction political environment, historically, what that's looked like is continuous CRs or repetitive CRs or a lengthy CR but certainly not a budget. And we factored that into our thinking in terms of what might that do in terms of the demand side of the equation. On the supply side, not to be the harbinger of bad news or anything like that, but we're still not out of the woods with COVID and what might be the next cold flu season bring and what might that impact me on the productivity of our workforce. And we experienced that, unfortunately, in the past 2 years, and so we factored that in. And that therein is driving the wider range of 5% to 9%. The lower end, if all these things break to the negative, it pushes us to the lower half. If it's not anywhere close to being as bad, then it pushes us to the top end. And so that's really why. And I think as we look where we land in Q2 and we consider what and when it makes sense to adjust guidance, that'll go into our decision-making at the end of Q2. Unfortunately, we have the CFO next to me, so he'll be on the hook to kind of make that call.

Yes. Absolutely. I think we've talked -- or you and Horacio talked about just looking and feeling more like a traditional year. And for those of you who followed our story for a long time, I think, hopefully, it will play out that way. And as you know, historically, Q2, for us, which is our current quarter, has been in the year with the highest book to bill and the highest net headcount growth. And so historically, again, we focus on building momentum through Q2 and then sort of riding it out. We invest a little more heavily in the back half of the year as a way to sort of restart the cycle. So we had great momentum in Q1 and I think Q2 will be largely determinant in addition to the factors Lloyd just described that are outside of our control.

Yes. So you both mentioned head count growth. And so I want to transition to that. Human cost of capital is obviously an important piece of the Booz Allen story as well as the industry's story. Attracting, retaining is key to growth. It's key to who you are. First quarter saw some nice client headcount growth. I think it was 4% year-over-year, sequentially, 1%. I think it was Horacio or Lloyd who mentioned on the earnings call that you were seeing some early indications in the quarter that, that momentum, that hiring momentum was continuing. What can you tell us at this point in time, 2/3 plus of the way through the quarter, about the hiring environment?

I think we feel good about where we are. Our people are leaning into it. The labor market has softened a little bit in certain pockets, which is to our benefit. I think we got a compelling story. And quite honestly, Kristine Martin Anderson, our Chief Operating Officer, that's been a big focus of hers and her ability to help drive some -- not just the discipline in the process but actually make some material changes. We think about this, it's not just hiring, right? It's, a, net head count; and b, how do we shorten the cycle from when we identify candidates. Do we actually get them billable, right? Because there's a lot of goodness in drawing that down. She and our people services team and our business leaders have made some real strides. So I think I'd characterize it as we're comfortable with where we are, and we feel like we've got good momentum.

How about on the demand side? I think industry-wide, last quarter, bookings were generally light and not necessarily a dynamic that was idiosyncratic any one company. There's a number of things that people have pointed to within the government, whether it's COVID and people not returning back to their office, the contracting officers, et cetera. And so those folks, who are now sitting back and looking at the dynamics out of 1Q, 2Q of the calendar year, I think maybe there's a flush here in the current quarter where you have a high watermark for bookings. Being that withdrawn to the end of the government's calendar year, what can you guys tell us about that dynamic? Have some of those bottlenecks been removed as COVID variance has faded and we're seemingly out of the woods at least for the moment?

I'll start. So for Booz Allen, our bookings for the first quarter were 0.72x, which is interesting, probably a little bit lighter than we typically see. But the trailing 12 months was 1.2x. And I'm on record for saying, hey, if we're 1.2x or better, that's good. We've got plenty of work to go prosecute. Hand in hand with that, our win rate for recompete, we're at 90%, for new work in the mid-60s, which is an uptick a little bit. So that's all good. Our backlog also grew around 7% year-over-year, but it's essentially at an all-time high on a historical basis. So when we looked at that, we're like demand is there. The market is procuring work. Yes, the recompetes are frustrating, but that affects all of us and full steam ahead. And quite frankly, we were feeling really good exiting Q1 with our positioning on some large procurements. More to come on that when we talk about our Q2 results. So it was playing and this year is playing out exactly on the demand side as we expected and in some cases, even better than expected. We are not seeing sort of the floodgates of procurements either to get ahead of midterms or anything of that sort. It has been a normal cadence in terms of our interface with the opportunities that we're pursuing. So there haven't been any curveballs. Of course, in a portfolio as large as ours, we've got about 4,600 task orders and contracts. There's going to be things that shift to the right. Maybe there are some procurements that are released a little bit earlier than expected. But most of the shifts have been clerical in nature, not our clients coming to us and say, "Got this budget thing and it's spooking me." So we're not hearing a whole lot of that. It's been really head down. Let's obligate the dollars as best we can before we get the end of September. So demand signals are pretty strong from our vantage point.

Fantastic. I want to shift gears here a little bit and turn to capital deployment and in particular, M&A first. Since this is in your wheelhouse, Matt, how should we think about strategic M&A in this market environment? And maybe what does the pipeline look like? And how are you thinking about the regulatory environment and how that might impact acquisitions going forward?

Yes, thanks. That's a question, as you can imagine, I get quite often. How would I characterize the current M&A environment? I would say that people are just being more cautious. If you think about who are the players in the M&A market, certainly in the mid-tier, a lot of the sellers and increasingly a lot of the buyers are private equity firms. And both they and the strategics like Booz Allen, I think, are being cautious, but it's still robust, right? I think long term, we all believe M&A is good for us and good for the government as an accelerant of innovation, which allows us to develop new things and provide more value to the government, which makes us more competitive. So what I'm seeing is that there are a couple of bellwether processes out there that people are paying attention to. And there -- my hypothesis is you're going to see more deals done outside of processes because of the need to find the right fit, to have comfort that you're going to close, that you have a partner that really wants to transact. And I actually think that works to our benefit because if we think back on the 3 transactions we've done or at least the 2 transactions we've done and the 1 we hope to do, all 3 of those were done outside of processes. And all 3 of those were companies that we identified as great strategic fits that fit a real hole in our business and culturally, they want to be part of Booz Allen and part of the growth story, and then we made them happen. So that's my hypothesis about how it's going to shape up. But we are actively working it. And I would say our pipeline is strong.

Related to the M&A strategy, at least somewhat is, is what I find to be an interesting announcement you made not long ago, a $100 million corporate VC fund. How does this fit within the overall VoLT strategy? And maybe how does it differ from some of the equity investments you've made in the past?

Sure. I mean it's actually a natural evolution of our investments. Take you back. In 2015, we started a program where we did tech scouting and so we've got a dozen folks that are working to scour areas where there are a lot of companies doing innovation, small companies doing innovation to bring them on as partners to us and partners to the government. And so that's -- it's a robust team. They do phenomenal work. It's been a real accelerant, you're going to hear me use that word a lot, to our ability to innovate. And natural extension of that, and you saw this last year was, hey, let's actually invest in some of these companies. Strategic intent first, right? We want to further the partnership. We want to collaborate, do co-investment, et cetera. And equity is a useful tool situationally to do that. So I'd say CVC fund is a natural extension to that, where we said this is providing real strategic value. Let's formalize it. Let's professionalize it. We'll bring on the staff. Our intent, first and foremost, is strategic value to drive incremental growth and EBITDA through our business. But obviously, we're going to try to achieve typical venture-like returns. In terms of how it fits the VoLT strategy, I think, V in VoLT is velocity, allows us to be much faster, right, get up the innovation curve, engage more broadly across a portfolio of investments. And obviously, technology, it's squarely there as well. So early days but we're really happy with the equity investments we've done. Our clients are really happy with it, and we look forward to scaling it.

Okay. Great. I know we're getting short on time here. So maybe just one last question, and this is more to do with organic investment. I've been asking a lot of people, with one more dollar of IRAD, what would you place on what technology? Where would you bet?

I'll start. We're already on record for saying there are 2 what we believe are going to be hyper business growth opportunities. One is what we've called cyber platform. And the other one is more DoD oriented. It's called digital battlespace. So I know that's 2, not 1. But Matt will now be deciding with that dollar, marginal dollar, which way to go with it. But in the near term, we've identified 2 very attractive opportunities for us.

Fantastic. Gentlemen, I think we're out of time. Really appreciate you joining us here today, and congratulations to you both.

Thank you very much.

Thank you.