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

Delighted to have -- Brian Gesuale covering the defense and government services space at Raymond James. Delighted to have Booz Allen here to take us through their story. We have the company's Chief Financial Officer, Matt Calderone. Obviously, with all the geopolitical instability in the world, a lot happening with their business. So we think the timing to hear the story is fantastic. Booz has always been thought of as a leader in the space. And so with that, we're going to go through -- Matt is going to take us through 10 or 15 minutes on the story, then we're going to go into some Q&A. So if you have some questions, please just raise your hand and let me know. But with that, Matt, I'm going to turn it over to you.

Thanks. And I think I'm going to start with our Head of Investor Relations Nathan and to give you the standard Reg FD [indiscernible].

Yes. Thanks, Matt. Please keep in mind that some of the items that we will discuss this morning are forward looking and may relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecast results discussed in our filings with the SEC. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Now I'll turn it over to Matt.

Thanks, Nathan. Thanks, Brian. Thank you all to being here bright and early on the Monday morning. Happy to help get this great conference kicked off. So I've been the CFO chair now for 5 months. I think I have met some of you, there some new faces as well. And first, I'd like to say I truly do appreciate the opportunity to speak with investors and analysts. It's daunting when you hit the rapid fire side of questions, but it really has helped me learn more business, about how our perceived, how we create value, our performance in the industry. So thank you for that. I look forward to meeting more of you today or in the coming months. And as Brian said, I thought I'd take this opportunity today just to go a little bit more long form, no slides. We're a public company. Hopefully, you read our investor presentation, it's all out there. And just give you a sense for how I view the business, who we are, what we do, why and how we create value. And then we'll open it up and you can start the rapid fire questions. I'm sure they're quite a few of them. So when I think about Booz Allen, I think about 3 things. First and foremost, we are a company that's built to last. We are well positioned and diversified in a stable, currently growing U.S. federal government market. We're the organic growth leader in the industry, and we're committed to using our balance sheet to generate financial and strategic value. And lastly, and this is important, we have a history of innovation and transformation that allows us to stay ahead of our customers and to push the firm strategically forward. So I'll talk a little bit about each of those 3 themes. I won't go into the full Booz Allen origin story, but we've been around since 1914. We -- Brian is smiling, founded the management consulting industry, Ed Booz. We started our work with the federal government, sort of the genesis of our current business today in the 1940s when the Secretary of the Navy asked Booz Allen to take the entirety of the firm and support wartime production, and that's a client relationship that exists today. And I say that because we are a company that's built to last. And you don't get to where we are if you're not focused on customers, people and willing to innovate. So we have clients, not customers. We hire our staff for careers, not just for contracts. I think one of the things that makes it maddening, I know for our covering analysts is we tend to talk long term. We don't focus on specific contracts. We focus on the business over long cycles. We talk to our people about value creation and the value creation -- the virtuous circle of value creation. We invest in our people and our capabilities in technology that allows us to generate things that nobody else can at the intersection of mission and technology which provides incremental returns and above-market performance, which allows us to make folks in this room happy and to continue to reinvest in the cycle. I agree with the first in our industry to put out a multiyear investment thesis. We're currently on our second 3-year investment thesis for almost a year in that where we made long-term commitments on our performance because that's how we view the business. Our current investment thesis has us growing adjusted EBITDA dollars to $1.2 billion to $1.3 billion by the end of our fiscal year '25, which equates to, give or take, 10% annualized CAGR, if not more. So we are a company that is built to last. We've been around a long time. Our clients love it. Our staff loves it. We think it makes us a good investment. And we're well positioned and diversified in a stable and growing market. 97% of our work is with the U.S. federal government. Remaining 3% is a really awesome commercial cyber business that I'm not going to talk about today, but we love that business, too. We're spread across defense, civil and Intel, roughly 45%-ish in the defense market, about 1/3 in civil, the remainder in our intel business. We are working on some of the nations and our government's most critical challenges. As you think about it, health care, climate change, space, China, cyber. I mean these are real issues where we really need a whole of government response and our government clients, our partners need companies like Booz Allen that are specialized at making technology and applying technology and technical expertise work at the end points. And that's really what we're good at. It's taking cyber, AI, advanced analytics, not just off the whiteboard, but actually applying it to solve real mission challenges out in the business. We're the industry's organic growth leader. I think historically, if you look back decades, we've grown above market and above most of our peers with the exception of the COVID rebound year, which was a wacky time that I'm happy to talk about or not. I think that's founded in a couple of things. One, the capabilities, the long-term perspective, the virtuous cycle that I've talked about, but it's also rooted in the spirit of entrepreneurship that I think exists in our company. That really goes harkens back to the old consulting of our legacy. When I joined Booz Allen in 1999, I started in the commercial side of the business. And I was taught early on you get in with clients, you understand their problems, you solve them, and that's how you sell. And that's what we do now today, obviously, at scale. We're not just selling $1 million, $2 million, $5 million, $10 million task orders. We're winning big jobs as well. But it's all built on that foundation of the consulting mindset, the problem-solving mindset that is really embodied by all of our staff, all 32,000. We've grown organically on average almost 7%. Over the last 5 years, the investment thesis that I referenced earlier has a target of 5% to 8% organic growth this year and the 2 that follow through FY '25. We're ahead of that pace. Last quarter, we grew 10%, not just at the firm level, but across all 3 of our core federal markets and almost all of that was organic. So organic growth leader in the industry, and we're committed to using the balance sheet. And folks who have followed Booz Allen for a long time, that's relatively new. But if you look back, actually, really since Carlyle exited. So I think about us -- our balance sheet story starting in 2018. We utilized the balance sheet through consistent dividend policy and fair amount of share repurchases that have gone under the radar because that's how Booz Allen works. We tend to do a lot of stuff under the radar. And increasingly, M&A to generate significant shareholder value. So we're going to be patient. We're going to be disciplined. I'm sure, Brian, you have questions about the M&A environment. We've had made a handful of acquisitions in the last 2 years that are really paying dividends, but that's part of the Booz Allen story. Organic growth leader in the industry and using the balance sheet to generate financial and strategic value. And M&A, in particular, we think is important, done right and the right circumstances as a tool for us, not only to catalyze our organic growth, but to help us leapfrog technology cycles and build scale in technology areas that our clients need. And lastly, you -- we do have a history of being innovative and transforming. You don't stick around for 10 years by standing still. I love the stories, all the different iterations the firm has gone through. Again, I won't take up your time today, but go to the website, read it. It's a great story. But to give you a more recent reference point, I was brought into corporate to work for Horacio on our last strategy, Vision 2020, which we put in place in 2012, 2013 in and around sequestration to really drive the form forward because we said -- we're going to take this opportunity not just to survive, but it was a very tough budget environment but actually to transform. And that was the root of a lot of our move into the technical spaces. At the time, 30% of our staff was technical. Now it's over 70%. The remaining 30% are important. Those mission experts, the consultants, the problem solvers, hugely important as we're bringing technology and technical skills to mission. But we had the ability to transform, to see where the market was headed, to anticipate what our clients need. And that's just persisted today through our strategic program, through M&A, through a lot of internal investment, through our recently launched corporate ventures program. That is the spirit of Booz Allen. And so that is a great segue into VoLT, our current strategy, which stands for velocity. We need to get faster. Our clients need to get faster, the world is fast. Leadership, getting out ahead of clients, I think emerging as more of a market leader. As I mentioned, Booz Allen always like to do things in the crown. Again, I think that's part of our consulting heritage. You're going to hear a lot more about Booz Allen. We are a market leader. We want to be a market leader and we intend to continue to solidify our space there and technology. I've talked about the technology quite a bit. But really is the route. I mean technology is affecting all of us, certainly our clients. So I'll close with a story because I think it really typifies who Booz Allen is and brings to light some of these themes. Our CEO, Horacio Rosinski, had the foresight to bring our entire leadership team out to Hawaii a few weeks ago, not for the sun and the sand because we saw a precious little of that trust me. But because -- as we all know, eyes are turning to China and the [indiscernible] Pacific, and we wanted to ground ourselves as a leadership team on all of us, myself included in what's happening there and where we see the U.S. government's activities in that region progressing. It was fascinating, meeting with staff, meet with local officials, Congress people, a lot of clients, lot of 4 stars, and it was riveting to understand not just what our -- I think we have 300, 350 people out there and growing, what are they doing, but where do they see U.S. government activities in this region progressing and how can we support that. But what struck me was one interaction I had in a small group session with a relatively junior staff person. And this person is 3 years out of college. She was working on a job, talking about how you modernize logistics because you can imagine, logistics in that part of the world is challenging, data science background. And she was so excited because she was bringing -- coupled with some real logisticians and we have folks who do that come out of the military logistics experts, and this is kinetic and heavy lifting kind of stuff. And she was allowed -- she was able to couple what she was doing, what they were doing to really rethink through some fundamental challenges. And in doing so, she -- I think she sold she brought on a couple of our colleagues, right? So from what I said, almost a $10 billion company, a couple of FTEs, $1 million, no big deal, right? We need to scale that. But I turn to our Chief Technology Officer, Susan Penfield, at the time. And I said this is the spirit of Booz Allen. This is how we're all raised, right? You get in, you solve a client problem. We bring all the firm and who knows, right, that 2 FTEs may turn into 10, May turn into 20, may turn it to our lasting capability. You just never know where it's going to go. And that's that kind of client-focused problem-solving entrepreneurial spirit that I think is at the root of makes Booz Allen special. So that's the story, built to last with a diversified business that's well positioned in a stable market, organic growth leader in the industry and committed to using the balance sheet. And lastly, a spirit of innovation and transformation that has gotten us to where we are, and I think will allow us to continue to provide consistently above-market returns. No slides.

No slides. Perfect.

Preformed.

Matt, that was great. We are going to open it up to some questions. Should you have any just raise your hand and I'll get to you. But I think you summarized something really well built to last, that we as well. So maybe with that in mind, if we think about Booz Allen VoLT always been very strategic in our thought process. Can you elaborate a little bit more on you VoLT strategy, maybe unpackage some of it in more detail. Talk about some of the venture arm that we created, talk about some of the investments in artificial intelligence, data analytics, cyber with some of those domains and maybe speak to help market reshape the portfolio over time A lot?

That was a big question. Yes. So as I mentioned, VoLT stands for velocity, leadership technology. The velocity part, a lot of that is internal, to be honest with you. We need to get faster, so we can be faster on behalf of our clients. the influx of commercial technologies into the government marketplace has provided a real opportunity for us and companies like us that know how to apply technology and integrate it in new ways to solve problems for our clients. But we do you faster, both in terms of how we face the market. And honestly, we're not a $10 billion company. So that's a big focus of our newly named, I guess -- not newly named, she's been in place for almost a year, Chief Operating Officer; Kristine Martin Anderson. And then to answer your question more specifically about sort of technology investment, we historically have had a high investment model as you know. Some of that's built in -- or a lot of that is built into our rates. And the government appreciates the fact that we, over decades, have invested in building capabilities and pulling capabilities out of the work that we do, which I think is increasingly an area of emphasis. So if you think about our Cyber Precog the partnership with NVIDIA we're doing. A lot of that was not stuff that we did in a lab, it was a lab, but it was lab-focused on solving a client problem. And so there's an immense amount of IP and IC that we generate through the course of our client work that we're working on codifying and repurposing. It's a huge advantage that a company like Booz Allen has and it's part of our value proposition to our government clients is, hey, we've seen this problem over here, and we can help you fix it, right? When you think about cyber or AI, there's just an immense -- so much of the application of the -- development and application of those tools and methodologies is experience-based, we got it. And so there's an element that's always happened that we're letting an even greater fire underneath of that, which is how you pull the stuff out of work you're doing, codify it, package up, make it reusable, resell it, et cetera. The CBC, in particular, I think I put on the far end of that spectrum, right, which is, hey, there's this huge innovation ecosystem out there that, honestly, we've been involved in for the past 5 or 6 years. We've had about a dozen or so people in what we called our strategic partnerships group, but really, they're folks where you can imagine, Austin, Boston, et cetera. And the whole job is to develop relationships with these emerging technology companies, so we can bring them on to our clients. And CBC was just a natural manifestation of that, and those relationships. It's just a way for us to further embed ourselves with companies that we think have real potential. And obviously, we're setting it up so we make a financial return with the amount of dollars in the context of our full balance sheet investment is relatively small but the value is really to our government clients that we can bring those folks at scale and help them scale, but under client engagements to really solve a problem. Just to give you one example, a company called Latent AI that we invested in with the problem they saw is you think about how do you get AI to the edge, right? How do you get it to -- I'm holding up an iPhone to a device that's fielded in difficult terrain. And what they do, I'm giving them a plug, is they've got in lay person's terms, packet compression and decompression that's specifically well tuned for AI algorithms, right? So it's a perfect match when we're trying to win a piece of work to say to the government, "Hey, we've got this partner that solves this critical part of the problem, right, which is latency and bandwidth in terms of how do you get data to and from the edge." That's just one example of dozens of partnerships we have, and we've again, codified a few of them with actual -- cemented a few of them with actual equity investment. We're doing a decent job. That's a big question.

That was perfect. And I promise I just have a single part question.

Okay. You got a question here, too.

Just -- maybe just to that on something everyone in here would love to hear your thoughts on how those fiscal '24 budget process works out? What's your crystal ball say what kind expectation? How do you want folks to think about it?

Yes. So I get that question a lot. And we talked to a lot of experts that are more expert than we are. So how about this, I'll summarize what I've heard from the experts, but this is not my crystal ball because I think if anybody tells you they know what's going to happen, I'm not sure I'd make that bet. Look, the government has got some serious challenges, as we talked about across defense, civil and Intel that they need to face. And my sense is there's fairly broad support for keeping government funding going. The big question, as we all know, is look, we saw what happened around the speakership election, what is that dynamic? How does that play out? Who knows? And I wish I had a better answer. I will say a couple of things. One is I think we've been in a CR environment, what, 11 of the last 12 years, something like that. So this is not an unfamiliar pattern for us and for our clients. And I think we -- and they have gotten better at figuring out how to navigate through it in all kinds of budgetary and funding environments. So we got a budget now. We've got a robust budget. We're leaning into that. I think Horacio said in our last earnings call, maybe I did. We're keeping our foot on the gas. We're talking to clients on a daily basis about the mission and how we and they can continue to support these important missions regardless of what happens in October. But I do think there is broad support to fund the government at levels commensurate with the mission. It's a question of whether that survives political dynamics and a lot of things, but I'm not a politician. So I'll leave it at that.

I'm wondering if you may comment on the hiring environment. And I think as we go through all the TMT meetings this week, we'll hear about a lot of layoffs?

Yes.

And how that may be benefiting you or what you guys are seeing?

Sure, happy to. So we've been hiring like crazy. I think we ended last quarter with year-over-year consulting headcount up about 7.5%-ish which is -- I don't know if it's historically high, probably isn't historically high, but it's certainly high in recent memory. And that's been a combination of robust hiring. Obviously, we're doing that because we see demand in the marketplace some changes that we've made in terms of our hiring process. We -- as painful as COVID was, we learned a lot about how to hire at scale in ways that are more efficient. And when we talk about hiring, it's not just making the offer, but how do you shorten the cycle from when someone contacts you and they're actually billable, and we've really looked at it holistically. To answer your more specific question, give or take, 70% of our folks have clearances. And so it's not like someone's going to quit a job out in Silicon Valley and all of a sudden show up working for intelligence community client 2 weeks later. We are starting to see a pickup in hires from the tech firms. I think it's affected us more on the attrition side, to be honest with you. We've seen meaningfully below historic levels of attrition in the past few months. And my personal hypothesis, and we're such a big diverse firm. It's hard to really peg that to one factor, but I think that's a factor. Look, our folks work for Booz Allen because they want to serve the mission, right? And I think that's a factor as well, right? The important work that we're doing in Ukraine tends to be galvanizing, for example, for our defense and intelligence community colleagues. But certainly, I think we're seeing lower attrition. And I would -- I believe a portion of that is due to some of the tech hiring dynamics. Is that helpful?

Great, Matt. Maybe we just talk a little bit about M&A. Maybe take a couple of case studies where why some of these more recent deals were good fits, what the opportunity is and how the integration and funneling through for top line synergies is playing out?

Sure. So we've done, I'd say, 3 medium-sized deals over the last almost 2 years now, I guess, times passing. Liberty, at TracePoint ever watch. We've also divested a bunch of small pieces of our business. as part of sort of our old strategy, businesses that we were good businesses, but we thought we're better fits elsewhere. So taking them in turn, Liberty is a great case study I think how 1 plus 1 equals 3 to use the first year business [indiscernible]. The genesis of Liberty was that we had done an amazing job both organically and through acquisitions, a company called Spark and a company called Aquilent of really developing great positions in the civil marketplace, particularly in health, around agile development and agile development and DevSecOps as you went from waterfall development to different ways of doing large systems and software projects. And Spark in particular allowed us to do agile scale. So have multiple scrum teams working in parallel to actually solve a big problem like supporting the evolution of the VA's critical mission systems, break, break. Our clients said, that's awesome, right? But there's this capability out there called low code, no code that we think you guys aren't taking advantage of enough. You're building too much ad hoc and one-off, whereas this allows you -- the analogy I keep using is prefab housing, right? And it's still hard, right, because how do you integrate that and how do you architect it and how do you apply it to mission systems, but you shouldn't be building all these components on a one-off basis and Kristine Martin Anderson, our COO, who then ran our civil business when out and listening to it with clients and they said, "Hey, this is an issue, right? We see this as a critical error you need to have in your quiver that you don't have at the scale we want both for current work and for future work. So we went out and we found a company, Liberty that you had some largest sales force jobs in the federal government, and it's been an awesome acquisition, right? This great acquisition as a stand-alone. They just beat us on a big job. So we knew they were good. We help them scale. They've been fantastic. And we're now start -- at the point where we're starting to shove a lot of work, not just from our VA clients or health clients but across the firm to that platform because it's a business model that's purpose built for that purpose. So it's an example of how the firm works. As an institution, the advantage of one P&L and our ability to move work around, it's M&A as a catalyst. It was a great deal of stand-alone, as I mentioned. But that is leading to us winning work to us delivering, current work in a better way, Wash, rinse, repeat. TracePoint. So that's fully integrated. Tracepoint is a commercial and cyber incident response firm. That's very different than our business. It's quick term. They work for insurance panels. They get 10, 15 jobs a week. Hey, such and such hospital system got popped. They're being held for ransom come in and help us solve that problem. So it gives us channel access at scale and again, a business model that's better suited for a different market, and we're starting to really take advantage of that. I will say there, too, one of the interesting dynamics about cyber is if you think about where the attack surface has gone, it's migrated from military-grade defense, industrial, force-on-force cyber to a lot of the attack surfaces now in the commercial space into our government clients are very, very interested in what's happening out there. So there's natural synergies, not just in terms of how do you solve a piece of work and how do you use this as channel access to cell follow-on. But honestly, there's spillover into our government work as well because they're just seeing so many incidents and so you're getting to see how tax surface is evolving and how the average age is evolving. And then Everwatch -- so that's -- we're just about to fully integrate them Tracepoint, it EverWatch is a little newer. I think we said publicly the 6 months that we spent in DOJ purgatory was not helpful, but we still see a ton of long-term potential for that business.

Yes. As we've seen revenue, your revenue grown in the last 5 or 10 years, we've not really seen a commensurate increase in margin is for people who are new to your company is your business just something where scale does not improve efficiency?

Yes. So I think we actually have seen a bit of an increase in margin, EBITDA margin. If you go back 5 years ago, our margins were in, say, the high 8-ish, and we're pegging high 10s to low 11s now. That said, 97% of works are with the federal government. A lot of it's cost-plus work. And that tends to be relatively capped to the margin side. So Scale does matter. We've got enticed some advantage of scale too -- I'll answer your question in 2 ways. Our margins have improved, but I think the reason that we've been talking about margins probably stabilizing or normalizing is because we've reached the point at which there's not a whole lot more we can get out of scale.

Great. Matt, we're going to leave it at that. We are going to host a breakout session downstairs in the [indiscernible] room. So please join us there and we'll continue discussing there.

Great. Thank you.