Booz Allen Hamilton Holding Corp (BAH) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Booz Allen Hamilton Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to your speaker today, Nick Veasey. Please go ahead, sir.

Thank you. Good morning, and thank you for joining us for Booz Allen's Fourth Quarter and Full Fiscal Year 2020 Earnings Announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2.

I'm Nick Veasey, Vice President of Investor Relations. And with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President, Chief Financial Officer and Treasurer.

As shown on the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our company's services and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our fourth quarter fiscal 2020 earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed 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 in our fourth quarter fiscal year 2020 slides.

It is now my pleasure to turn the call over to our CEO, Horacio Rozanski. We are now on Slide 5.

Thank you, Nick, and good morning, everyone. Thanks for joining the call. I hope that you, your families and your colleagues have been healthy and safe since we last spoke.

It's been 8 weeks since Booz Allen's fiscal year 2020 ended, but March feels like a distant memory given all that has transpired since then. Our world, our communities and our institutions have taken drastic necessary steps to respond to the COVID-19 pandemic. Its toll has been unlike anything most of us have ever experienced in terms of illness, lives lost and economic hardship while first responders, doctors and nurses and all essential workers have inspired us with their actions. From everyone at Booz Allen, our heartfelt condolences to those who have lost loved ones and our deepest gratitude to every single person on the front lines and to their families.

Without a doubt, the worldwide mobilization against COVID-19 has dramatically changed the way we live and work. And so this morning, I will begin by discussing Booz Allen's response and approach going forward. Then Lloyd will build on these themes while providing the details of our fiscal year 2020 performance and our outlook for fiscal year 2021.

Reflecting back to early February, when COVID-19 began spreading across the globe, our firm immediately organized a crisis response team and committed to 3 overriding priorities: first and foremost, to protect the health and safety of our people, their families and our communities; second, to continue supporting the critical missions of our clients; and third, to ensure the financial and institutional resilience of our firm. These priorities have guided every decision since then, including our move to mandatory telework on March 17 and were also at the center of our resilience program announced on April 1.

We took bold action, creating $100 million pandemic resilience fund by containing and reprioritizing non-personnel costs. Using those funds to increase job security and expand benefits, we believe, could relieve the initial stress and anxiety caused by the pandemic and help the most vulnerable in our communities. This, in turn, will allow our people to channel their talent and energy into meeting the needs of our clients, an outcome that directly contributes to Booz Allen's growth while preserving our resiliency. I am proud of how well the Booz Allen team responded early in this crisis and how quickly and effectively it adapted to a new reality.

As we continue to learn about the virus and adjust our operations, we think about COVID-19 in 3 distinct phases. The first phase encompasses the crisis response I just described and is now behind us, roughly from the end of January through the end of April.

We are now in the early weeks of a second phase, which is likely to last many months. It is characterized by a continued threat from the virus with no proven treatment or vaccine in place. Decisions for how to balance public health and economic considerations largely will be made locally and at varying levels inside different institutions and organizations.

The third and final phase will begin when the virus is controlled by some combination of treatments, vaccines and immunity. We ultimately expect a new normal to emerge, incorporating lasting social changes that result from the pandemic. As a business, we view this as a source of new challenges and opportunities that need to be considered and anticipated starting now.

Because phase 2 will encompass much of fiscal year 2021, I want to summarize key decisions we've made about how we will manage through it. The health and safety of the total workforce remains our top priority. This include, not only our own people but also those we work with every day. We have already begun talking with clients about our approach, which we are calling safe return.

During this phase, we will continue to maximize telework. Our experience to date has shown that not only does remote work reduce the spread of infection and incidence of disease, it is also highly effective. Across our firm, teams are delivering against contracts, advancing missions, hiring talent, capturing work, innovating and collaborating, albeit telework.

We also recognize that in some cases, particularly with classified missions, there are very few options for telework or its effectiveness is limited. In these cases, we have and will continue to work with clients to ensure a safe return to their facilities. Guided by federal, state and local policies as well as advice from our own experts, we are creating safe return plans in collaboration with each client. These plans consider things like social distancing rules, travel restrictions, cleaning procedures and protections for those at high risk. Great execution of these safe return plans, we believe, will help keep everyone healthy and safe while maintaining critical missions.

As part of phase 2, we are piloting antibody testing protocols, conducting contact tracing and fine-tuning our employee benefit programs. And much like in phase 1, we are managing costs so we can execute the mitigation strategies that prove most effective. This is a complex but critical undertaking, and we are all hands on deck.

Looking further down the road. After the virus is controlled and the pandemic over, society and therefore, Booz Allen, will not completely go back to how things were prior to COVID-19. We are already seeing emerging themes, such as faster adoption of telehealth, virtual learning and secure mobility solutions, for example. These changes are beginning to reshape demand. And since Booz Allen doesn't ever stand still, we're already tilting in those directions as we develop our next growth strategy.

Turning now to the financials and to our current operations. It is important to underscore that we were able to quickly respond to the challenges of COVID-19 because of our talented team and strong financial footing. Fiscal year 2020 was another outstanding year for Booz Allen. Once again, we met all of our financial objectives while serving clients with passion and dedication.

Because so much of our work is mission-critical, it must continue without interruption, and the key strategic trend that fuels our business has not changed. The demand for integrated technology solutions continues to grow. Since the health emergency begun, we've been in constant communication with our clients. And like all of us, they are grappling with unprecedented changes and have rallied to maintain missions in a whole new environment. Many are turning to us for support of new requirements related specifically to the government's COVID-19 response.

Today, we are operating at pre-pandemic productivity levels, what a credit to our teams and our clients. In fact, about 90% of our billable work is being delivered via telework, and roughly 10% of our people who are still going into critical facilities are supported by specific plans developed in partnership with our clients to maximize everyone's safety. Our leaders are managing the business with agility, hiring against more than 1,000 sold and funded positions, aggressively pursuing new work and realigning people and resources to the areas of greatest need and opportunity.

As I've said many times before, this is the advantage of our business model. Our single P&L allows us to operate as one team. Throughout any crisis or disruption, we are in it together.

In sum, the management team is very pleased with how the business has adjusted to the demands of today's environment. We have entered fiscal year 2021 with confidence and momentum. We expect to deliver another year of industry-leading organic revenue growth and strong cash generation. This will allow us to continue investing in people and technologies, exploring option value opportunities for the future and delivering value to our shareholders.

Given the complexity of the environment, we expect to have a strong first half with more uncertainty in the second half. The uncertainty stems from several unknowns, including the course of the pandemic and its possible effect on our workforce and the outlook for the budget beyond the current government fiscal year. Despite the uncertainty, we are pleased to once again increase our expectations for ADEPS growth in our investment thesis.

You'll recall that the thesis originally envisioned 50% ADEPS growth over a 3-year period from the end of fiscal year 2018 to the end of fiscal year 2021. Last year, we increased the goal to 66% ADEPS growth over that period. The FY '21 ADEPS guidance range we are announcing today translates to 70% to 80% cumulative ADEPS growth from the end of fiscal year 2018 to the end of fiscal year 2021.

The people of Booz Allen deserve all the credit for the growth we've achieved and for sustaining our unique position in the market. Their hard work and the financial results they produce are the best proof points of our firm's fundamental strength and resilience.

Lloyd, over to you for the details of the full year and our guidance for fiscal year 2021.

Thanks, Horacio, and good morning, everyone. I'll start by echoing your comments about our excellent operational and financial performance in recent years. This track record has positioned Booz Allen to not simply react to the challenges of this pandemic but to proactively address the key opportunities and risks that emerge from it.

We are managing the business to ensure long-term strength, just as we have done in the past with things like budget sequestration and government shutdowns. We are investing in our people and allocating our resources efficiently as we strive to continue generating industry-leading organic revenue growth. Importantly, and as Horacio mentioned, our strength of execution has again supported an increase in the 3-year ADEPS growth target in our investment thesis. I will discuss this in more detail when I cover fiscal year 2021 guidance, but first, I will provide an overview of our fiscal year 2020 results while highlighting the expected performance impacts of COVID-19.

Our fiscal year 2020 results are shown on Slide 6. At the top line, revenue increased 11.3% to $7.5 billion while revenue excluding billable expenses grew 9.9% to $5.2 billion. This double-digit organic growth was the result of both sustained demand for our services and solutions and an increase in head count to meet that demand.

Turning to Slide 7. Our fourth quarter book-to-bill was 0.4x, which is somewhat lower than what is typical for our Q4. As I noted during the earnings call last quarter, we are building on our strong foundation of diversified small awards by pursuing larger, more technically complex bids. This has naturally increased the volatility of our book-to-bill metric. Nonetheless, we have entered fiscal year 2021 with enough client demand to continue growing in line with our investment thesis targets.

Demand for our services and solutions remains healthy, particularly in defense and civil markets. Win rates in fiscal year 2020 were up, and our qualified pipeline, which includes several large, new and recompete opportunities, increased 31% compared to year-ago levels. COVID-19 has not to date caused significant delays in awards.

Our full fiscal year book-to-bill in 2020 was 1.2x. Total backlog grew 7%, yielding our largest ever fiscal year-end backlog of $20.7 billion. Funded backlog was down 1% to $3.4 billion. Unfunded backlog was up 23% at $4.5 billion, and priced options increased 5% to $12.8 billion.

Pivoting to head count. As of March 31, we had 27,173 employees, up by 1,104 year-over-year or 4.2%. This was below our 5% head count growth target for the year, but the revenue impact was more than offset by higher employee salaries as we continue to hire and retain talent with in-demand skill sets.

COVID-19 has already transformed the labor market, and I am pleased with how well our recruiting efforts have transitioned to the virtual environment. And while hiring has slowed due to the pandemic, our attrition thus far has dropped by roughly half. As such, early signs point to continued head count growth. We believe the positive hiring and retention trends we're seeing in the early weeks of this fiscal year demonstrates the wisdom of the resilience program we put in place on April 1.

Moving to the bottom line. Adjusted EBITDA for fiscal year 2020 was $754 million, up 11.8% from the previous year. This increase was driven primarily by our top line growth, strong contract-level performance and solid operational management. As a result, our adjusted EBITDA margin for the full year was 10.1%. This was in line with our expectations even with an approximately $10 million end-of-year negative impact to EBITDA associated with COVID-19. These costs were related to transitional expenses, temporary reductions in billability in March and charges in the intelligence market we believe we may not be able to recover.

On this last point, I am pleased with how well we have worked in partnership with our defense and intelligence clients, where classified work is concentrated to retain continuity of service and ensure a ready workforce. This is a challenging situation, and we appreciate that the CARES Act recognize the need to keep this critical workforce ready and available. Invoicing under the terms of that law has begun, and current guidance suggests that fee will not be reimbursed on certain contracts involving shift work. This affects all companies in our industry. We estimate that while temporary, it will have an impact of approximately $6 million in lost EBITDA per month.

Full year 2020 net income and ADEPS also grew significantly. Net income grew 15% year-over-year to $483 million. Adjusted net income was $449 million, up 14% from fiscal year 2019. Diluted earnings per share rose to $3.41 from $2.91 in the prior year, and adjusted diluted earnings per share increased to $3.18 from $2.76 in the prior year. These increases were primarily driven by revenue growth, profitability improvement, a lower effective tax rate and a lower share count in fiscal year 2020 due to our share repurchase program.

Regarding our effective tax rate, during Q4, we adopted an alternative approach to identifying qualified expenditures for our research and development tax credit mentioned last quarter. As a result, we recognized approximately $38 million in tax credit this quarter, net of reserves, which we excluded from adjusted net income and adjusted diluted earnings per share. We expect this method to provide additional credits in the future, and we have included the expected benefits in our guidance for effective tax rate.

Turning to cash. We generated $551 million in operating cash during the fiscal year, representing 10% growth over fiscal year 2019 and putting us at the top of our forecasted range. Our strong operating cash flow, fourth quarter revolver draw and the delayed draw term loan A execution at the start of the fiscal year allowed us to end the year with $742 million in cash on hand.

So far, we have not experienced material delays in cash collections due to COVID-19. The virtual invoicing process has run smoothly due to the ongoing efforts of our team and our government partners.

Capital expenditures in fiscal year 2020 totaled $128 million, in line with our expectations, as we continue to invest in infrastructure and technology. Though I'll address forward-looking CapEx spend in the guidance section, at this point, the long-term impact of COVID-19 on facility spend is unclear. However, this is an area where we see opportunity as we adopt new ways of working. All in all, our operating performance and prudent capital management have resulted in a strong, well-capitalized balance sheet. This is particularly useful in these turbulent times as it provides tremendous strategic and operational flexibility.

Please turn to Slide 8. During the fourth quarter, we continued to execute on a prudent capital allocation strategy designed to deliver both near- and long-term shareholder value. In the fourth quarter, we repurchased $156 million worth of shares. For the year, we repurchased a total of 2.7 million shares at an average price of $69 per share. Including dividends, we returned a total of $333 million to shareholders during fiscal year 2020, bringing total capital deployment through the first 2 years of our investment thesis to nearly $700 million.

Looking forward, we are reiterating our $1.4 billion capital deployment target through fiscal year 2021, a key part of our investment thesis. Our priorities remain: reinvesting in our business, securing our quarterly dividend, appropriately priced strategic M&A and share repurchases and special dividends.

Today, we are also announcing that the company has authorized a regular dividend of $0.31 per share, payable on June 30 to stockholders of record on June 15. Dividends remain an important component of our strategy to create value for shareholders, and we are extremely proud of the growth in our quarterly dividend, which amounts to a robust 30% growth rate for fiscal year 2020. This reflects the confidence our management has in the business and its future potential and demonstrates our commitment to the targeted 2% yield in our investment thesis.

Turning to guidance. Please move to Slide 9. Last year at this time, due to an uncertain federal budget environment, Horacio and I characterized our plan for fiscal year 2020 in 2 parts: an aggressive first half followed by a more conservative second half. Today, we are operating in an unprecedented environment, and I'll characterize our guidance in a similar way.

We are actively managing through the early phases of the pandemic. As Horacio described, our team and our government partners have rapidly adapted so that our nation's critical missions continue without disruption. This early success under extraordinary circumstances plus our strong underlying fundamentals allow us to carry momentum into the first half.

We remain in a growth posture but acknowledge that there is reduced visibility into the factors that will drive performance for the full year. As Horacio noted, the second half of our fiscal year could be impacted by unknowns and related factors. These include the course of the pandemic, whether use of paid time-off returns to more typical patterns around the summer vacations, the timing and extent of our return to secured workspaces, the status of appropriations after September 30 and a possible post-election reordering of budget priorities.

As a result of these uncertainties, our guidance ranges to begin the year are slightly broader than in recent years. Our fiscal year 2021 guidance is as follows. We expect revenue to grow between 6% and 10% with growth in revenue excluding billable expenses expected to be in the same range. We expect adjusted EBITDA margin to be approximately 10%, on par with fiscal year 2020. This margin guidance incorporates uncertain fee recovery on work invoiced per the CARES Act.

At the bottom line, we expect adjusted diluted earnings per share to be between $3.40 and $3.60. This guidance is based on 136 million to 140 million weighted average shares outstanding and a tax rate in the range of 20% to 23%. We expect to generate $550 million to $600 million in operating cash, which, again, to this point, has not been materially impacted by COVID-19.

And finally, we are forecasting CapEx of approximately $80 million to $100 million. We continue to invest in infrastructure and technology, including a supportive move toward telework. To be clear, facility spend in the near term will decrease given the current environment while our long-term strategy is still being developed as we contemplate a safe return.

In closing, we are extremely proud of our fiscal year 2020 performance and pleased to be forecasting another year of robust results. Booz Allen remains on a clear and strong path, delivering exceptional financial results while investing for the future. We have built significant momentum in the business, and our people are as engaged and focused on our clients' missions as ever. And finally, even amid uncertainties, the entire management team is optimistic about the year and confident that our firm can make a difference in unprecedented times.

Horacio, back to you.

Thanks, Lloyd. The past 3 months have been incredibly challenging for our firm, our clients and our country. What stands out for me though is how individuals have rallied to support each other and to carry the burdens together. I'm incredibly proud of how the people of Booz Allen have responded at work and in our communities, from making personal donations that supplement our corporate contributions to food banks, first responders and military families in need to volunteering with local charities and making face masks for colleagues and are showing the best of Booz Allen. It shines through in their work as well.

Allow me to give you just a few examples. One of our associates, Sarvesh Nalluri, is the heart and brains behind the data visualization project that is helping the Veterans Health Administration prepare for a possible surge of the virus in rural areas. One of our epidemiologists. Dr. Sumiko Mekaru, worked on her own time with other scientists and researchers to build an openly available global COVID-19 pandemic map. She is now creating models and dashboards that will help leaders at the DoD and Defense Health Agency maintain readiness.

And elsewhere in the Department of Defense, we have a team that worked around the clock for 6 days to move critical pre-deployment training of soldiers that is usually done in person to a completely virtual environment. Since the beginning of April, about 3,000 soldiers have received this live virtual instruction, a mandatory course that helps keep them safe while deployed.

And finally, because May is Military Appreciation Month, I'll mention [Monique DiChiara], a cybersecurity analyst from our office in Lexington, Massachusetts. [Monique], like many others at our firm, is a member of the National Guard. She was recently activated to assist with the COVID-19 response and led a contract tracing mission for her unit. We are so proud of her service to our country and are delighted to have her back.

These and many other individual stories demonstrate the values, hard work and dedication of this firm. We're a company that mobilizes to meet any challenge or opportunity. Over the past 3 months, our mantra has been in it together. It conveys unity for sure, but more importantly, it underscores our institutional strength and resilience, the very things that create value for our investors and all stakeholders.

So I'll close with a big thank you to the people of Booz Allen. You amaze me and inspire me each day. It is my distinct privilege to represent your work on these goals each quarter.

With that, Nick, let's open the line for questions.

Thanks, Horacio. Operator, please open the line.

(Operator Instructions) Our first question comes from Sheila Kahyaoglu with Jefferies.

Horacio, this one's for you. In May, you were awarded a rather large task order under the Alliant 2 contract vehicle to support the DoD's Joint Artificial Intelligence Center. I think this is the largest JAIC award to date and Booz' second largest AI program just following eMAPS in 2018. I guess this was rather unexpected for us. Were you expecting it? How do you think about contracts like this relative to your revenue growth framework? Maybe if you could tell us more about it.

Sure, Sheila, and thanks for the question. We're obviously very pleased to have been awarded this contract. It was part of a competition, and we're just very glad. As I always say on the calls, the size of these contracts or task orders is important, but for me, equally important is the actual content and the strategic value that they create/. And in this particular case, this is an opportunity to support the JAIC as they accelerate the deployment of artificial intelligence broadly across the DOD. And obviously, it's a mission that is near and dear to my heart and to the people of Booz Allen, and we care about it deeply.

More broadly, I think it's another proof point of our strategy as the leading provider of technology solutions to our clients, and it demonstrates that our strategy works. Artificial intelligence in general is a great example because it's both an opportunity to grow a workforce in our traditional business that scales around these new technologies and to create option value in this case with our multi program. So all in all, very, very pleased, and we look forward to more.

I guess I'm going to ask another follow-up related to AI. Given -- I know that's a focus item for Booz. Have you start planning your next growth strategy? How do we think about the impact of COVID? It seems the focus right now is more on veterans’ health and tracing. Is there a larger COVID opportunity when it comes to AI?

I think when you look -- you got to put things in context. Right now, it's all about the response. Our clients are very focused on that, understandably. They're leveraging both existing technologies and new technologies as rapidly as possible. I think as you look forward, the need that is clear, especially when you operate at the scale of our clients, is the need to have all of this information from these disparate sources fused together, available and ready for decision-making almost instantaneously.

And in my view, artificial intelligence is going to be part and parcel of that, it's going to be a big deal. And that's why I'm so happy that we're both doing this work, but more importantly, we're also setting up the foundations for creating unified data environments and a lot of the things that are going to be required to make this real in the long run.

Our next question comes from Carter Copeland with Melius Research.

Horacio, I wondered if you might expand on that a little bit in terms of the demand environment. You talked about that kind of reshaping in the aftermath of COVID. Who leads or directs that reshaping? Is that customer driven? Is that driven, hand in hand, in partnership with you? I'm just trying to understand how you think that's going to evolve.

I think it's, first of all, too soon to tell exactly how it's going to evolve, right? I mean we're still in the midst of a response effort. As I mentioned before, we're going into what we view as a second phase, a more prolonged phase that is going to require a lot of rethinking of how things work. And then in the third phase, once, hopefully, this virus is behind us, there's going to be changes that are left that we're beginning to see. I mentioned before things like the increased adoption of telehealth, the need for secure mobility, virtual reality training.

All of these things are -- they were in the works already. What we're seeing is an acceleration in need and in desire to deploy these technologies, and we are positioned to help. This has been -- from the beginning of Vision 2020 in 2012, this has been our mantra, is we want to be at the center of our clients' missions, bringing technology to solve new problems. And again, we're seeing demand across the enterprise from intelligence to defense to, certainly, our health and civil business that relates to all of this.

Great. And just as a follow-up for Lloyd, you mentioned the qualification of research expenses and generating tax credits impacting the 2021 effective rate. How much do you envision the tax law change in '22 reversing that a little bit? Any color you can give us there on the step up?

Sure. Carter, as you know, more and more of our work has been transitioning to be in the area -- technically advanced areas like software-related engineering. So we had an opportunity to look at that. With our analysis that we mentioned last quarter, we reassessed our tax credits associated with our R&D expenditures going back to 2016 through 2019, and that yielded a net tax benefit of $38 million and -- recorded in the fourth quarter and excluded from ADEPS.

Now going forward, it's early to tell exactly what any changes may be and the impact on it. But we expect our effective tax rate, as we indicated in our guidance, to be between 20% and 23% in FY '21 and beyond that, depending upon the IRS ruling, to be in that range, if not slightly below that, given the reserve amount we made.

Our next question comes from Jon Raviv with Citi.

Good to hear from you all. Horacio, in those 3 areas that you mentioned, telehealth, virtual learning, secure mobility, could you expand a bit on those and sort of classify how those are playing out in the phase 2 and how they might play out in phase 3? And as you do, can you just talk about that pivot in the context of potential budget changes or budget priority changes? It seems to me that priorities will change, but priorities changing can actually be a place where you guys can really accelerate into some new spaces.

And it's -- again, I want to qualify this by saying we are in the midst of a rapidly changing situation and everything around us is changing. The thing that seems to be clear to us is this need to accelerate implementation of technology to respond to the environmental factors is, if anything, accelerating.

Telehealth has become a necessity, not just a technology that is in its infancy but a technology that is being broadly adopted. How to do that, how to do that securely, the changes that, that poses to the handling and management of the information that is provided and how all of that happens is going to have lasting effects on the requirements to continue to drive that technology.

On secure mobility, everybody is working from home. That creates entire new attack surfaces and tremendous opportunities for efficiency, for effectiveness, for resiliency. And we're right in the middle of both thinking through that for our own organization and helping our clients. This is a place where we're hopeful that a technology like District Defend, which we've been investing in, as you know, for several years, will come to the forefront and be very helpful.

And then in terms of virtual training, again, this is a trend that was already playing out that is accelerating and one where we have, over the years, invested significantly to be very relevant to our clients, especially as we were doing ID response and things like that. We saw a new generation of war fighters coming in that would be more willing to learn from gamified technologies, to learn from virtual reality. We have a network of labs that we've created to support that. And again, as all of these evolve, we will see increases in demand.

How that will change within any time frame based on budget priorities, as Lloyd pointed out, as I pointed out, there's some level of uncertainty around that. What I would point you to as it relates to us is our ability to evolve and move rapidly from one opportunity to another because of the single P&L, because of our culture. We just respond quickly to ideas. We invest on things that make sense for the long term. And hopefully, that makes us build to last.

And then just, Lloyd, on the margin of roughly 10%, we appreciate that FY '21 is encompassed by phase 2, if you will, with several inefficiencies associated. Could you somehow classify or characterize how much of that 10% guidance is being held back, if you will, by the inefficiencies such as the monthly impact from the lack of fee recovery and in the same context, how mix and commercial are impacting margin at this point?

Sure, Jon. Let me first recognize that we had exceptional performance in FY '20, Q1 through Q3, which really allowed us to allocate the resources in Q4, not only, to Horacio's point, to improve upon our competitive positioning, but also maintain the business momentum. And we see that, and we're very pleased with that performance despite the $10 million EBITDA COVID-related impact.

Going forward, we still expect our portfolio to perform as it did in FY '20. We're operating very well at the business and contract level. We feel our strategy is working, and we do have what we believe is a temporary headwind on the inability to collect fee in our -- some of our security and defense businesses. But we've taken that into account with our FY '21 guidance, and that's why we're affirming the 10% EBITDA margins.

Our next question comes from Cai von Rumohr with Cowen.

Good results again in defense and civil, but you saw continuing slowing in intel and basically a decline in commercial. Can you give us some color on what's impacting that? Is there much more COVID? And what is the relative prospects going forward for fiscal '21?

Cai, I'll start, and I'm sure Lloyd will want to add. First of all, the overall results, as you know, are quite good. Defense and civil are up to the tune of about 15% on the year, which is frankly ahead of our expectations, and we're extremely happy with that. We've been talking for the last couple of calls about the fact that our intel business was not adding people as quickly as it needed to, and we made some changes to accelerate that. And I think what you're seeing is the continuation of that trend and -- while, at the same time, we're working inside the business to return to a faster talent acquisition model and therefore, look to accelerate the growth in that business where the demand, we believe, is still there and still very robust.

Our commercial business, we called it flat for the year. It was flat for the year. And I think inside of that, there are some turbulence and variability in our Middle East business and more robustness in our U.S. commercial business. And I think the prospects especially for our cyber-centric business in the U.S. and around the world are excellent. We probably will still see some spottiness and variability in other parts. But overall, I am optimistic for our commercial business as we look forward.

And then a quick one for you, Lloyd. So the $6 million EBITDA per month, that's basically like close to 100 bps on the margin year-over-year. My understanding from other contractors is that the CARES Act did not reimburse for costs incurred prior to its passage, but was expected to reimburse for cost afterwards. Could you give us some color on what's in the $6 million? And where are we with what the act actually says?

Sure. Essentially, as we said in our prepared remarks, it's really complying with the CARES Act and our inability to invoice for fee. Now that being said, we're constantly in conversations with our clients. We are optimistic that this is a temporary dynamic, but we thought it was appropriate certainly in terms of the FY '21 guidance to do our best to take that into account. As Horacio said, we've got some unknowns, and this is one of them, but we provided a range that we think acknowledges the possibility that at some point in the future, the government will begin to pay on those invoices.

So have you assumed it goes for the entire year or not?

We -- as I said, we did our best to include it as a part of the year, but we feel that looking out 12 months, there could be the potential for that to turn in the other direction.

Our next question comes from Edward Caso with Wells Fargo.

I was wondering if you could update us on your optionality efforts. How -- what have you seen? What have you been able to capture so far? And again, remind us how you hope to capture them either through sales or annuity streams.

Sure, Ed. I'll start. As you know, at this point, we are focused on 4 distinct initiatives inside that portfolio that are the largest and then a number of things that we're building behind that, and the 4 are Modzy, which is our artificial intelligence platform and marketplace; our directed energy efforts; recreation.gov; and our District Defend secure mobility technology. And in each one of those, we have a distinct business plan. They are different by nature, and so they each monetize differently. But what they have in common is that they're all not directly labor-based. And so they create value -- first of all, they create higher margins, and they create value outside of having to add head count.

And we're seeing good progress, frankly, in all 4. It's probably more than the time that we have to take you through the details on each one of them, but I am both pleased and optimistic. They're all hitting their milestones. They're all on plan. At this point, the revenues, the profits are not material to the overall operation. We didn't expect them to be at this point, but they're very much on track. And my hope is the future is very bright.

My other question, there seems to be a drift higher in cost-plus revenue and a drift down with fixed-price revenue. Presumably, that's having some impact on your margins. Do you see that trend continuing and acting as a headwind going forward?

We see the uptick in cost reimbursable largely due to the growth in our defense business, where, more times than not, that's the contract type that's applied. That being said, Ed, within our performance, both cost reimbursable and time and materials, we have been able to execute in a manner that has maintained, if not grown margin a little bit.

The downtick in fixed price is really, from our vantage point, a timing and client's preference. And we don't get too excited if there's a couple of percentage points decrement or increase or not. However, we continue to sell our higher-margin capabilities as we always have said. We're operating even more effectively year-over-year, and we're not experiencing as many self-inflicted missteps as we have in the past. And so for '20, it was really the COVID-related impact that brought it down a bit.

If you'll allow me, let me put this in the context of the overall investment thesis because I think it's important to just frame it all together. If you remember, we -- over the period, the 3-year period that would end at the end of this year, if we actually meet our guidance for the year, we'll have added roughly $2 billion in new revenue, almost all of it organic. Our margins will have gone from, Lloyd, check me here, the low 9s to 10% or the low 10s, and then we would be looking at an ADEPS growth over a 3-year period in the 70% to 80%.

So we've been able to do all of that while continuing to invest for the future while continuing to drive the business while continuing to drive our margins. And inside of that, like Lloyd pointed out, what's happening to the different piece parts of the business and even to the contract structure has in no way been an impediment. In fact, we're actually extraordinarily pleased with the performance of the contracts.

Our next question comes from Matt Akers with Barclays.

I wonder if you could talk a little bit more about kind of the timing of when people can return to some of these secured facilities that they may not be able to access now. Has that started to happen at all with some of the states kind of easing lockdowns? Or how should we think of sort of the timing of that?

So let me try and frame it. First of all, on some of our critical facilities, our people continue to go. They were on the front line. The work that we're doing could not be stopped and could not be brought into telework. And they've done an amazing job of continuing to be there to support our clients. I couldn't be prouder of them and, frankly, of our clients because our clients have acted with a great deal of responsibility, disciplined diligence. And as a result of that, we've been able to have people at these critical facilities while keeping everybody safe.

As we look forward, we anticipate and are beginning to see more requirements for people to go in. It's not a huge amount yet and it may not be. Our goal is to maximize telework because we know telework works for the vast majority of what we do, and we expect it to continue. Every time we send people back to a client facility because the mission requires it, we do it in consultation with the clients and by building one of the safe return plans that addresses all of the things we talked about before to make sure that our people and our clients are as safe as possible while we do this.

I think this people-centric approach that we've taken, that our clients have taken is really the right way to go, and it will meter the need to bring people back in a way that is responsible to both the needs of the mission and the safety of the people. And I think, again, as I said before, executing against these plans is our top priority.

Got it. And then I guess just a follow-up. So you had talked about maybe, at some point in the next year, issuing like kind of the next stage of long-term guidance. Obviously, a lot of uncertainty with COVID and the election and potentially budget pressures, as you called out in the prepared remarks. I mean should we still think about that as sort of coming up in the near-term future? Or when do you think of sort of framing that for us?

Sure. I'll start. I know Lloyd has a lot to say on this topic, too. This is an area that's near and dear to our hearts. I think having clear strategic guidance both internally and externally is important, and we have been working on a strategic review that is ongoing.

At the right time, probably -- certainly, in the next 12 months, we will look forward to trying to give both strategic -- clarify our internal strategic changes, if any, and give strategic guidance externally and the associated financials that go with that. I think -- again, it's done against the backdrop of an investment thesis for the last 3 years, and we still have to deliver on the last year and we're obviously very focused on that, has been very successful. And we have to stay adaptive, and we have to be able to incorporate, as we always do, everything that we learn in the environment as part of our plans and as part of our strategy.

Yes. Matt, not much more to build upon. I was looking forward to getting out with our new or updated investment thesis in the fall, at the latest end of the calendar year, but then the pandemic hit. So we had to obviously do a bit of a reset there. But as Horacio said, we hope to be in a position shortly after the new year, post the election to get back to everyone with what the update would be.

Our next question comes from Robert Spingarn with Crédit Suisse.

Lloyd, I wanted to start with you on the cash flow. So with the $550 million delivered in fiscal '20, your guide is for flat to plus $50 million, and I thought I'd just ask about the puts and takes around that spread.

Sure. Well, first of all, we're very pleased with our consistent ability to collect cash, and largely, as you listen to these calls, this has been a journey. We put in place a variety of operational changes, improved our relationship with the payment offices as well as balance that out on the payable side.

The increase in our guidance, we're very pleased and happy to do that. The puts and takes really are around the unknowns, as you heard in our prepared remarks, as to what, as the pandemic unfolds, might be the impact on the virtual processes that are working now. And in the first half, to the best of our ability, we've got more clarity than the second half. So the cyclicality, we don't expect to change. We remain confident that we've got sustainable changes in place. But as we've done in the past, if we see that we are doing better, we'll advise everyone of that and make the adjustments accordingly.

Okay. And then Horacio, just a couple of quick things First, on the telework, you've talked about how effective it's been for you, and we've all seen that. What do you think about the customer? Do you think that there's an opportunity, one, for the customer, DoD specifically, to increase telework as this -- post crisis? And is there an opportunity for you in there?

And then the other question I wanted to ask you was on your book-to-bill. Here in the first half, do you see a similar trend as the last couple of years, something like, let's call it, a 2.0 book-to-bill for the first fiscal half?

Let me take the first part. I think Lloyd will want to take the second part. We wouldn't have been able to move to this level of telework if it weren't for the fact that our clients have both encouraged and allowed it and worked right alongside with us. And I think we're all learning. We have, for example, learned to write these very large proposals entirely virtually. This is not something 6 months ago, we could have told you we could do. And I think our clients are learning, too, about both some of the opportunities and the limitations of these new platforms, and I think this whole thing is changing people's minds.

I see in that an opportunity to do more remote delivery, which would be both more efficient and more effective, to our clients. It would require people to move less often. It would have -- make different talent accessible to our clients, and our clients see that, too. And so I look forward to working with them to try and enable as much of that as humanly possible.

On the book-to-bill front, I know Lloyd will want to talk about the numbers. All I can say is demand for what we do, fortunately, continues to be very robust. And we see a lot of opportunities, and we're writing proposals at an accelerated pace. And again, in the context of what's going on around us, we -- I'm very optimistic and pleased with the performance so far.

That's right, Horacio. Let me point you to a couple of indications -- or indicators that give us the optimism. One is that our qualified pipeline is up 31% year-over-year. We're seeing recompetes up 17%, and the new work opportunities indicative of the JAIC win have also increased about $1.6 billion. '20 was a lighter year in terms of recompetes, but we're expecting an uptick in that in FY '21. I think it's a bit premature to talk about specific numbers, but it's safe to say that we expect a seasonal pattern of book-to-bill to be largely on the same curve.

Our next question comes from Seth Seifman with JPMorgan.

I was wondering about the budget remarks you made earlier in the call. When we think about what the risks are and the puts and takes there in the second half of your year, is it really about whether there's a fiscal '21 budget passed on time? Or are there other specific things that you think would affect your fiscal '21?

I think at this point, we mostly want to acknowledge the potential volatility in the budget discussions. There's -- we're under a 2-year budget deal. But the reality is that there's been an unprecedented number of things that are happening as we speak in the response to COVID, and we aren't sure how that all is going to -- how it's going to go.

Having said that, I go back to the point that we feel very good about the demand signals that we're getting from our clients for the things that we do, that we have been as mission centric as we know how to be because we believe that is a more resilient part of the market. And I think as we demonstrated even with this early approach to this crisis, we can respond very quickly to changes in market signal and market environment. And so that's how we see the second half of our year playing out.

I would just add that across all of our metrics, we're expecting to deliver a very strong FY '21, coupled with a strong balance sheet that we see as a strategic asset. The budget is just one of several variables that are influencing our guidance. On the supply side of the pandemic impact in terms of our people, future use or not use of PTO, shift work arrangements and collaboration with our clients, all of that are also variables that influenced our guidance.

Okay. Great. And one quick follow-up. I know this can be difficult at times given the high percentage of classified work, but you've mentioned going after additional large opportunities. You've also mentioned more recompetes this year. On either side, is there anything specific that you can call out in terms of opportunities that we should be watching for?

Not at this time. I would just point you to, on a recompete basis, our win rate increased 7% to 90, which is getting back to our historical performance. And on the new business side, we've got a win rate of 61%. So that, coupled with our differentiation, our client relationships and our workforce, we feel we're poised to have another solid year.

And this concludes the question-and-answer session. I would like to turn the call back over to Horacio Rozanski for closing remarks.

Thank you, and thank you all for your questions and for a very robust discussion this morning. If you'll allow me, I'd like to close today by once again saying thank you to the people of Booz Allen, to our clients, and to our investors and analysts. It's because of all of you that Booz Allen can continue to strive for excellence, and we can lean forward as an institution that can do the right thing both for the short term and especially for the long term.

So thanks again, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.