Booz Allen Hamilton Holding Corp (BAH) 2011 Q4 法說會逐字稿

Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's earnings call covering fourth-quarter and full year fiscal 2011 results. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions. I'd now like to turn the call over to Mr. Curt Riggle.

Thank you, Steve, and thank you all for joining us today for Booz Allen's fourth-quarter and full fiscal year 2011 earnings announcement. I'm Curt Riggle, Director of Investor Relations, and with me to talk about our financial results for this morning is Ralph Shrader, our Chairman, Chief Executive Officer and President, and Sam Strickland, Executive Vice President and Chief Financial Officer. We hope you've had an opportunity to read the news release on our fourth-quarter and full year earnings that we released this morning. We've also provided presentation slides on our website and are now on slide 2. On today's call, Ralph will provide you with highlights of our performance and share his perspective on Booz Allen's accomplishments and opportunities. Sam will then review our financial results in detail, including our income statement, balance sheet, cash flow and backlog. Ralph and Sam will also look ahead and provide guidance for our fiscal year 2012, which began on April 1, 2011.

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 fiscal 2011 fourth-quarter and full-year earnings release and in our SEC filings.

We caution you not to place undue reliance on these forward-looking statements, which are made 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 for our non-GAAP financial measures, and most of the comparable GAAP measures in our earnings release and in these slides. It is now my pleasure to turn it over to our CEO, Ralph Shrader, and he will start on slide 4.

Well, thank you very much, Curt. Good morning to all of you, and thank you for joining us today. I will start with the highlights of our financial and business performance, and then I'll turn to Sam, who will provide a detailed explanation of Booz Allen's financials for both the fourth quarter and the full year of fiscal 2011. We will then share our perspective and guidance for fiscal 2012. I'm very pleased to report to you that Booz Allen grew revenue in all of our major markets, defense, intelligence, and civil, for the full fiscal year and the fourth quarter year-over-year. We saw margin gains due in part to a larger percentage of higher-margin fixed price work.

Here are the headlines. Fourth quarter revenue increased to $1.49 billion from $1.35 billion. Our full-year revenue increased to $5.6 billion from $5.1 billion the prior year. Net income for the year increased to $84.7 million from $25.4 million in the prior year. Adjusted EBITDA increased to 20.7% to $444 million for fiscal 2011 and full-year adjusted diluted earnings per share increased by $0.41 to $1.24 per share.

On a year-over-year basis, we also grew our total backlog to $10.9 billion as of March 31, 2011, which is the closing day of our fiscal year and that is up from $9 billion. This backlog increase of 21.2% from the prior year shows the continued strong client demand for Booz Allen services, and our longstanding ability to target and win new work and successfully defend existing recompete contracts in a highly competitive marketplace. We also successfully restructured our debt, had lower interest rates, and there's no question that fiscal 2011 was a landmark year for Booz Allen.

We had a successful IPO last November, which puts us now in the ranks of the Fortune 500 largest public companies, complementing the recognition we've had for many years, from such sources as Fortune Magazine, Working Mother, GI Jobs and others as a Best Company to work for. In just the past month, we've received two additional recognitions of Booz Allen's commitment to be an employer of choice, and a good corporate citizen. The Disabled American Veterans selected Booz Allen Hamilton as the nation's outstanding large employer of the year for 2011, and the Business Committee For the Arts selected us for their Top 10 Best Companies Supporting the Arts in America for 2011.

This past year, we continued to fine tune our matrix, which aligns functional capabilities across all of the markets we serve. We enhanced our engineering and operations, technology, and analytics capabilities, and named Horacio Rozanski as Booz Allen's Chief Operating Officer, focusing on the operational performance of our matrix organization. We continue to experience growth in all of our markets. In particular, we're seeing strong demand in the areas of cyber and health.

Our ability to grow both top line revenue and bottom line profits, even in a challenging and uncertain Federal Government budget environment is testament to our unique management consulting heritage. The collaborative culture, which is fostered by our single P&L and common bonus structure, and our continued ability to deliver value and enduring results to our clients. We expect to continue to expand in our core market and intend to expand access to commercial and international markets for all our service offerings when the non-compete agreement with our spinoff, Booz & Company, ends on July 31 of 2011, and I'll talk more about our future prospects in a few minutes. I'd like to turn the call now over to Sam, who will provide added detail about our financial performance.

Thank you, Ralph. Good morning to all of you, and thank you for joining us. I have the pleasure of telling you more about Booz Allen's fiscal year 2011 fourth-quarter and full year financial results. To keep from having to say fiscal many, many times during the rest of this call, all references to 2011 will refer to the fiscal year end March 31, 2011, and all references to 2012 will refer to the fiscal year end March 31, 2012.

In addition to the GAAP financials, we also report Adjusted Net Income and adjusted earnings per share numbers. We include these non-GAAP measures because there have been a number of significant financial transactions which have impacted the financial statements. Starting with the Carlyle investment in 2008, and continuing through the most recent fiscal year with our IPO and debt refinancing. We believe the figures for adjusted operating income, adjusted net income, adjusted EBITDA, and adjusted diluted earnings per share provide better insight into our operational results, because they remove the effects of non-recurring or unusual items such as these financial transactions.

With that context, let's turn to slide 5 for a closer look at our fourth quarter 2011 which shows a 10.4% increase in fourth quarter revenue over the same period last year. This top line growth was a result of deploying additional consulting staff against existing funded contracts and new funded contracts in all of our markets, and a related increase in billable expenses. In the fourth quarter, operating income increased to $83.7 million from $48.6 million, and adjusted operating income increased to $101.9 million from $72.1 million in the prior period. The increase in adjusted operating income was primarily driven by higher revenue and increased profitability, which was positively affected by a continuing shift in Booz Allen's contract mix towards more fixed price contracts. Net income during the fourth quarter of 2011 increased to $18.1 million from $4.9 million, and adjusted net income increased to $50.5 million, up from $20.1 million for the prior-year period.

Adjusted EBITDA increased 36% to $115.6 million for the fourth quarter 2011 compared with $85 million for the prior-year period. In the fourth quarter, diluted earnings per share increased to $0.13 per share from $0.04 per share in the prior-year period, while adjusted diluted earnings per share increased to $0.36 per share from $0.17 per share in the prior year period. Now there's a reconciliation of diluted earnings per share to adjusted diluted earnings per share, shown on Exhibit 4 of the press release.

Turning now to our fiscal 2011 full-year results on slide 6, Booz Allen's revenue increased by $468 million or 9.1% over the prior year, with our top line standing at $5.6 billion at the close of the fiscal year, up from $5.1 billion in 2010. Our revenue increase was a result of deploying additional consulting staff against funded backlog, under both existing and new contracts in our core Federal Government market. Very solid growth, despite funding delays by the US government.

In 2011, Booz Allen's operating income increased to $319.4 million from $199.6 million in fiscal year 2010. Adjusted operating income increased to $392.5 million from $313.2 million in the prior year. As in our fourth quarter results, this increase in adjusted operating income was primarily driven by higher revenue and increased profitability, which was positively affected by a continuing shift in Booz Allen's contract mix towards more fixed price contracts.

In 2011, net income increased $84.7 million from $25.4 million in 2010 and adjusted net income increased to $157.5 million from $97 million in 2010. Adjusted EBITDA increased 20.7% to $444.4 million in 2011, compared with $368.3 million in 2010. Again, primarily as a result of the growth in adjusted operating income. In 2011, diluted earnings per share increased to $0.66 per share from $0.22 per share in fiscal 2010. Also in 2011, adjusted diluted earnings per share increased to $1.24 per share from $0.83 per share in 2010. Now this excludes the effects of an $0.08 per share benefit related to the reversal of tax reserves during the third quarter of 2011.

As I mentioned earlier, we provide these additional non-GAAP figures of adjusted operating income, adjusted net income, adjusted EBITDA and adjusted diluted earnings per share to provide a review of the operating performance of Booz Allen's business, separate from non-recurring or unusual items, such as the financial transactions related to the changes in our capital structure over the past three years. I should point out that our fully diluted share count was a weighted average of 127.4 million for fiscal 2011.

Now let's move to one of my favorite things, which is cash. Booz Allen has a very strong track record of generating cash and we continue our excellent cash performance in 2011. Net cash provided by operating activities was $296.3 million compared to $270.5 million in 2010. Free cash flow was $207.6 million in 2011, compared to $221.2 million in 2010. Free cash flow in 2011 was impacted by spending cash on several important things, we believe will pay off well in the future.

Specifically, there was a $16.5 million cash effect that related to the prepayment costs associated with early repayments of debt and the debt refinancing in February 2011. Additionally, we have embarked on a facility strategy in the metropolitan Washington DC area which involves renovations for hoteling and distributes our office space across the region to reduce the commuting time of our employees. This benefits their work-life balance and the environment, plus going forward, we expect these investments to reduce our facilities cost relative to our headcount growth.

Our day sales outstanding were 68 days, another strong year in the area of cash collections. As I believe many of you are aware, the 180-day lock up associated with our IPO expired on May 16th, and there have been some subsequent sales of Booz Allen stock by former commercial partners, by retired partners, and some active partners. I'll leave the analysis of share price implications to the financial community, but from what we hear, the additional float created by these sales is desirable.

Okay, a good place to finish our discussion of 2011 is backlog, which is an important indicator of the health of our business. As mentioned earlier, our total backlog at fiscal year end was a robust $10.9 billion. Of this, funded backlog as of March 31, 2011, was $2.39 billion, compared to $2.53 billion as of March 31, 2010. Funded backlog was impacted by the absence of an annual budget for government fiscal 2011 which led to the repeated use of continuing resolutions to fund the government, and as we all know, a threatened government shut down. This was resolved on April 15, 2011 by the passage of a spending bill providing funding for the government through the end of the government's fiscal 2011.

I should note that another important component of total backlog is priced options. Booz Allen's priced options during 2011 have increased by more than $1.5 billion, a significant contributor to that increase in priced options was a signing of a 10-year cyber contract in the intelligence market. Now, I'd like to turn back to Ralph, who will talk briefly about our growth strategy, and then I will finish the formal part of our discussion with a look at Booz Allen's guidance for 2012. We are now on slide 7.

Thank you, Sam. As we look to the future, Booz Allen will continue our strategy to build on our core strengths, and be out in front of client needs and market challenges. I want to emphasize that the US Federal Government is our primary business. We are extremely proud of that business and its continued growth, despite challenging market conditions. We recognize there are likely to be continued issues in the federal budgeting process. Concerns about the debt ceiling, pressures on federal programs and budgets, and this has slowed our growth somewhat.

However, Booz Allen has historically done well in times of change. Clients turn to us with our management consulting heritage and strong technology capabilities to help them become more efficient during times of stress. Beyond our large Federal Government business, going forward, we intend to capitalize on Booz Allen's unique advantages in new market areas that are adjacent to and aligned with our core. Now what do I mean by that? Well the non-compete agreement preventing Booz Allen from working in commercial and international markets expires at the end of next month. We expect to move quickly into industries such as financial services, healthcare and energy, where we see strong intersections between commercial and government sectors, and into geographies where we already have strong demand, such as in the Middle East.

I should note that we recently opened an office in Abu Dhabi, and moved a partner there to lead it. Our commercial international expansion is a focused strategy, building on our strengths. It is focused in areas that benefit from our management consulting orientation, combined with strong technology, engineering and analytics expertise. Throughout the non-compete period, Booz Allen has had open access to commercial and international markets in cyber security and this is already a strong, growing business for us. Our commercial clients have been asking for more than just cyber security services, and after July 31, 2011, we will be able to say yes to that.

To meet the growing demand for cyber talent in all of our markets, we have an in-house center for advanced technical training. We also have a partnership with the University of Maryland. Those of you in the Greater Washington and Baltimore areas are probably hearing our radio ads that are part of an ambitious cyber-recruiting campaign going on this Summer. There's no question this is a very exciting time for all of us at Booz Allen. Now for the guidance numbers, I'll turn it back to Sam.

Thank you, Ralph. As I hope we've conveyed, we are proud of the results Booz Allen has delivered for our fourth quarter and full year of fiscal 2011 and we expect positive revenue growth and margin improvements to continue in fiscal 2012 as shown now on slide 8. At this point, we are forecasting top line growth in the first half of fiscal 2012 to be in the range of mid single digits, with higher growth rates expected in the second half of the year, similar to the pattern we experienced in fiscal 2011. This is in line with the US government's historical timing of contract awards and funding patterns, which have historically increased in September at the end of the government's fiscal year and reflects our current expectations for continued growth despite the generally challenging environment for government contractors.

In 2012, diluted earnings per share is expected to be in the range of $1.40 to $1.50 per share, not including any potential gain from the sale of our state and local transportation business, and adjusted diluted earnings per share is expected to be in the range of $1.55 to $1.65 per share, higher than previously forecast, with bottom line performance expected to benefit from reduced interest expense, and an attractive contract mix of more fixed price work. These EPS estimates are based on fiscal year 2012 estimated average diluted earnings, diluted shares outstanding of 143 million shares.

In closing, I'd like to call your attention to our balance sheet, which is exhibit two in our press release. Specifically, the significant decrease in long-term debt. As a result of the IPO, the refinancing of credit facilities and the use of cash on hand during 2011, Booz Allen has less total debt outstanding and at lower interest rates. We expect the resulting annual reduction in interest expense to positively affect earnings in 2012 and beyond, by approximately $38 million after-tax per year, assuming no change in the interest rates on our outstanding indebtedness. As a result of the IPO, and the use of cash on hand, Booz Allen reduced its total outstanding debt by $574.3 million to $994.3 million. And now we would like to open the lines for questions.

Thank you, Sam. Our Chief Operating Officer, Horacio Rozanski, and Senior Vice President and Controller Kevin Cook are also here with us today to answer questions, so Steve if you would provide instructions for those on the call?

Certainly, sir. (Operator Instructions). Nathan Rozof with Morgan Stanley.

Hi guys, congratulations on the EPS beat in the quarter. I think you're 2 for 2 in this regard in terms of upside on EPS so congrats from me.

Thank you.

You're welcome. I wanted to dig a little bit more into the outlook for fiscal 2012. Specifically I wanted to get a sense for a few things. One is, on the revenue side, in terms of the ramp from the first half to the second half, are you still expecting that to be in line with your prior view of high single to low double digit revenue growth, and then secondly, given the upside in margins in the quarter, I just wanted to get your sense from whether or not this new higher level of margins is sustainable, given the improved mix towards fixed price contracts, and if you still see profitability improving kind of by the 10 BPs per year going forward.

Okay, let's see if I can remember all those questions, Nathan. The answer to your question is, we do expect a more robust second half. If you take a look at what's happening to us in the first half, the continuing resolution of course continued through April of this year. Compare that with, I think it was closed off in December of the prior government's fiscal year, so the entire contracting community is about a good 3.5 months or so behind, so they're going to be very focused on getting all of their money allocated by September 30. The result of that of course is that in fiscal 2010, we had substantial awards in March, because that was about 2 months after the continuing resolution was cleared.

Now, we didn't see that this year. Frankly, in March, the government was working going through all of its shut down scenarios, so we're a little later in the cycle, and I think that's one of the reasons we're seeing dampened growth in the first half of the fiscal year. That said, we have every indication there's going to be, and the government is going to get all of its money allocated by September 30, and we would expect a similar pattern in the second half of the year to what we saw in 2011. Now, with respect to the margin improvements, yes, we still believe we'll see that 10 BPs a year going forward.

Okay.

Did I get all your questions?

Yes, I believe you did. So just one last confirmation question before I turn it over here. Thanks for answering the first litany, which is just that, does your outlook for the top line for fiscal 2012 include any potential benefit from commercial and international or is that still more or less potential upside?

That is more or less potential upside. I think we've continued with that pattern to say we are, as you know, we're investing in those markets. We have that investment baked into our forecast. We want to have a little something in our pocket to provide a cushion against whatever might happen in the government market, so yes, we haven't forecast a lot of revenue there.

Great. Thanks and congrats again, guys.

Joseph Campbell with Barclays Capital.

Good morning. It's actually Joe Campbell and Carter Copeland, and we wanted to add our congratulations on the second beat of the results, and for raising the guidance in 2012. It's certainly a good way to start off.

Well, thank you.

Particularly, it's a very tough environment out there with the CR and so on. We wanted to ask you, Sam, if you could drill down a bit on some of the forward-looking debt, just as Nathan asked. The backlog was sequentially down and so too was the employment, the funded backlog from the Q3 to the Q4, and we weren't quite sure how to process it. It was nicely up year over year, and then I wondered if you could also give us a bit more color in your various sectors in terms of both how you see, how were the results in the year, and whether you see any different outlooks for the various pieces and sectors going forward.

Okay, well let's address the backlog and the headcount issue. First on the backlog, as I mentioned in March of 2010, we had substantial awards. Again, the rule of thumb seems to be that after a continuing resolution, it takes the government contracting shops around 2, 2.5 months to sort of get things cranking. As a result, if you go back in the January-February time frame of 2010, we really didn't see a lot of awards, and then the money started flowing heavily in March, so we had a very robust March awards month, let's call it. That drove the funded backlog as of March 31, 2010. Because we were still under a continuing resolution this March, we didn't see that ramp up start in March. In fact we saw, we really didn't see many, much in the way of awards in March because frankly, the government was going through its various shut down scenarios.

Actually, that carried over into April as well, so I think we're just now starting to see the contracting community get ramped up, so we would expect substantial awards between now and September 30. We would expect funded backlog to be up nicely as of September 30, again, our prediction is we'll be operating under some form of a continuing resolution starting in October. I have no idea how long that will be, but I think the contracting community has now gotten into a pattern where they're going to put out enough funded backlog to sort of carry things for, let's call it a 6-month period or so, so that's why we expect in the second half of fiscal 2012, which we're in now, to look very similar to the patterns we saw in fiscal 2011.

Now, as to headcount, as you'll recall, Joe and Carter, we went through our take share program last summer where we kept headcount, we dampened it a bit as we were waiting for the contract awards to build. Those started building in March of 2010. We then started our take share campaign and that started to kick in robustly in the July time frame, and we hired from July through October for us--

Over 4,000 people.

Yes, over 4,000 folks, so we wanted to make certain we had the capacity on board to be able to prosecute what we were expecting and what turned out to be significant awards by September 30 of 2010. After that, of course, we felt like we had the headcount in place to burn the backlog that we had, again following the same patterns as we did last year, we have not added a lot to capacity frankly, as we work through the continuing resolution, as we tried to prepare for any government shut down. I think what you'll see now is that we'll start to add capacity again, building towards the September 30 due date for the government getting its money allocated.

Now, as to comments by sector, as you know, we have said that we do operate this as a single P&L, so we are not particularly comfortable talking about performance in any particular sector. I think it would be safe to say that we see in 2012 the same dynamics that we've seen in the last couple of years, which is dampened growth rates in defense with a bit more robust growth rates in the intelligence and civil sector. So I think as you'll recall, we moved, well Ralph it was 2, 2.5 years ago, we moved 5 senior partners into the civil markets to take advantage of what we thought was going to be growth there and that's certainly paying off, but again, the reason we don't like to talk about those sectors, if you think about our matrix environment, we feel like our strength is the ability to deploy business drivers, and deep functional expertise from market to market depending upon where the opportunities are.

Just to follow-up, so on the headcount reduction, you actually had a reduction in force in 1 of the sectors, or did you have it Company-wide or how did you lose the people?

Joe, our folks aren't organized by market, for the reasons that Sam stated. It's Horacio. What we're trying to do is make sure we have the right skill sets and the right capacity to prosecute the market as we saw it, and we essentially eased on recruiting and just natural attrition of the business took care of most of it, and then in a couple of small skill sets, where we just weren't seeing the demand, we allowed that attrition to happen a little faster, but generally speaking, the business is very robust and what we were trying to do was set it up so it could go against demand as we saw it.

And just finally, the $6.1 billion, the kind of high single digit, low double digit number that's still an expectation for the revenue for 2012?

Yes, something in that neighborhood.

Great. Carter, did you have something?

Yes, just in terms of the CR, you said you have baked into your base expectation that we will be, come October, operating under a CR again. Is that the sort of core reason for why the civil opportunity you're sort of keeping in your pocket, you're viewing those as offsetting, is that a way to think about it?

You said civil, did you mean commercial?

Commercial, excuse me, yes.

Yes, right. That is the way to think about it. We see, we believe there is a market both in the commercial markets and the international markets, and we're investing there, let's see what it brings.

And I think the best way to think about our business is really the portfolio look that we take, and I realize that there was certainly a strong desire to try to break it down into chunks, and I think again, our strength is the fact that we manage it across-the-board, and by having the capabilities actually flow across, we think we're well-positioned to be able to respond to whatever peaks and valleys there might be. I think our realistic presumption is that there will not be an approved Federal Government budget for the next fiscal year on October 1, and I think it's also a reasonable assumption to think that process could last as long as 6 months again, maybe longer, but we're not overly concerned about that, given our ability to be able to move resources among the 3 major Federal Government marketplaces, which is we've done very effectively.

And then given what we think will be a rather robust demand for the services that we are providing in commercial, that our resources can move across these boundaries rather fluidly and quickly, and again, not being encumbered by individual P&L or even expectations in individual markets, this is something that I think we've applied very diligently in the past, and something that's a key part of our sort of our repertoire here, and something we'll continue to emphasize going forward, and I think that flexibility is a thing that actually gives us, I think, a great leg up if you will, in terms of being able to meet our financial expectations.

Thanks a lot guys, and congrats again.

Thank you.

Jim Kissane with Banc of America-Merrill Lynch.

Hi guys, this is actually Clayton for Jim. Congrats on the quarter. Just a little bit more about the backlog. I was wondering if you could kind of explain a little bit more about the priced options. You said it was one contract. Is that kind of the peak for total percent of backlog there, or can you expect more priced options going forward?

No, no, we were just saying priced options went up by $1.5 billion. There was one rather large cyber award in that. It was not the majority of that increase, so we would expect, we would fully expect to continue to win contracts and build priced options going forward.

Sounds good. Great. Thanks guys.

Robert Spingarn with Credit Suisse.

Good morning.

Good morning.

Very nice margins that you put forth there, and it sounds like that trend is going to continue as you go into next year, so Sam, I wanted to focus a little bit more on the guidance with regard to the revenue. Since you've got a fairly good look at what your earnings are going to be in fiscal 2012, why not just provide a full year of revenue guidance? You must have something in the plan to get you to the earnings.

Well, we took a look at, as you might imagine, it's hard to be very precise so we tend to take a look at, our financial models will normally model of couple of different cases, normally about 3 different cases, and then we try and make sure we set our earnings projections in line with that. We feel like that what's important over the long term of course is growth in earnings and we're committed to that and we'll certainly manage around a couple of point movement in revenue one way or the other so we felt like just to try to establish that as a pattern, we want to make sure that, what's the expression? That we're always meeting at least our bottom line commitments as we go forward, and our mission is to ensure that we have enough growth, that there's credibility behind that earnings growth.

Is there anything to the sequential decline in funded backlog here that just takes away some of that visibility that you might normally have?

Well on the one hand, you might say yes. On the other hand, to do that, you'd have to suspend belief that the contracting community is going to spend its money by September 30, so we fully, as I was explaining, if you just look at the timing of continuing resolution, completion, let's call it, getting beyond the continuing resolution, for the government's fiscal year 2010, they did that in December of 2009, which enabled the awards then to start in March of 2010. We're much later in that process this fiscal year, so the government is going to be pretty darn busy between now and September 30. Everything we have heard says that they will get that money allocated by September 30, so we just feel like we're later in the cycle, for reasons that we've talked about.

So we should look for a step up, if that's all correct and it plays out, and I know you're just guessing there, or at least trying to, to estimate,--

Well estimating as opposed to guessing, but yes.

Yes, sure so we should see a step up in funded backlog and total backlog with the September 30 quarter, and then depending on when the fiscal 2012 budget gets written into law, we would see another lag to the next step up.

Yes, again, the historically let's call it, and this is a very rough guideline, it takes the contracting community about 2 months, sometimes 2.5 months to kind of get the paper rolling after the continuing resolution is cleared, so let's just see.

Two more small things. First, if you could talk about the cadence of the earnings, as you expect them to rollout this year, it sounds like it will be back-end weighted again given the sales, and then if you could give a little bit more color, if someone could, to the types of contracts that are driving your growth in cyber.

I'll talk about the first and then I'll turn it over Horacio, the Chief Operating Officer, to talk about the second. As you know, we have said that we will provide quarterly updates to our annual guidance, so we've tried not to get into the habit of talking about individual quarters, simply because that's just not the way we run our business, so we really do focus on the annual results, and given 50% of our business is still cost plus, that means we've got some fairly strict accounting regulations we have to follow, we have to manage our indirect rates, so that will cause some of the quarterly earnings to move around a bit, but the important thing for us and for our rates is to make sure what we call, dock the ship as of March 31, so the patterns will be somewhat consistent from year to year, but not precisely.

Is there a quarter that's an outlier up or down?

Is there a quarter that's an outlier up or down? Not that we see right now.

Okay. And then just on the cyber?

On the cyber question, the good news there is that the pattern is the pattern that we've been talking about all along, and that we see, which is if you think about cyber as there being a portion of it, that is very much as sort of the basic infrastructure level and a portion of it that is the high end work for the intelligence community. The core of our strength and the core of our growth is really in the latter, is the high end work that we're doing for the intelligence community that is now not just in demand, in high demand in that community but beginning to take root into the military, where all of the services are very interested this, in addition to of course the very cyber command, and so we're seeing those capabilities and that reputation and that knowledge base begin to travel as we help the entirety of the government, and even the part that is possible to deploy is getting deployed into our initial commercial work, so we're seeing continued growth in our capability, continued growth in our strength and our brand reputation, against a part of cyber that is more at the leading edge and the part we care more about.

Horacio, is there any way to size all of that in terms of how much is cyber today as a percentage of the business, how much will it be in, let's call it 3 years, and then the spread between the basic infrastructure and the high-end core intelligent work?

The honest answer is there isn't a reliable way to size it, and that we're not really interested in sizing it because a lot of what, it's both hard to tell, if you're doing this right, it is hard to tell where cyber ends and other things in that kind of intelligence analysis apparatus begins, and it's also, there's policy aspects to cyber which are not necessarily deeply technical, but that are essential for cyber to operate successfully, that we're uniquely positioned to do, because of our matrix model and our ability to bring full capabilities to bear, and so we have not put the effort into trying to create a precise thing we don't want to talk about. In fact, we want this to be an integral part of our business that gets blended with all of our capabilities as we serve clients.

Okay, thank you.

Bill Loomis with Stifel Nicolaus.

Hi, thank you. Great results. Just looking at the awards, Sam, did I calculate it right, that there's about $1.4 billion in awards in the quarter?

Bill, that sounds about right.

So that was actually up a little bit from a year ago, and from what you're talking about, should we, I know you mentioned the September quarter year-end, but do you think for the June quarter we could also see a strong pick up in awards well over a 1.0 book-to-bill, if you did it just under a 1.1, and in a weak quarter?

Yes, well again, the good news in the weak quarter is we did have 1 nice, several hundred million dollar award there, as we mentioned in cyber in the intelligence community, so we're still taking a look obviously, we're in the first fiscal quarter, so we think that our best look as we know what it will look like as of September 30, what the government does between now and then, I hate to sort of slice it and dice it between one quarter and the next.

Understood, but you did say you're seeing a pick up as we sit here today?

We are seeing a pick up. There's certainly more activity, and I'm sure you all talk to a lot more folks than us, and I assume you're probably hearing the same thing from them as well, so definitely, you're starting to hear the drum beats increase in tempo.

Great, and then on the margin side, you mentioned a couple times the increase in fixed price helping margins, but cost type contract increased the same amount sequentially, and is up, and obviously that's a lower, much lower margin. Why is the increase in fixed price having such a higher impact than the increase in cost plus?

Well, because if you think about it, what's really happening is it's moving from T&M to fixed price which kind of makes sense, if you really want to do fixed price contracting, it's easier to tie in deliverables on a T&M contract than it is on a cost plus contract. Again, the nature, as you know, Bill, the reason for cost plus contracts is that you're exploring, you're trying to figure out what you should be doing, and it's awfully hard for the government to write an acceptance criteria for that, so when we take a look at our margin growth, again, fixed price is more profitable than T&M, more profitable than cost plus so you're seeing a migration from T&M to the fixed price.

And a 50%-plus type gross margin, is that sustainable going forward, or is that kind of a 1 quarter?

When you say a 50%?

Just straight cost of revenues over your revenues.

Honestly, I don't take a look at it that way, so I haven't calculated that number, but again, we would expect to continue to improve our margins by the 10 basis points that we've talked about in the past.

Okay, thank you.

Brian Gesuale with Raymond James.

Yes, hi guys. Excellent job executing in this market. Wanted to ask you some questions, a little bit more on the pipeline. Wondering if you would give us a sense, some metrics and some color maybe, about what the pipeline looks like coming out of this budget in pass, compared to last year, and with the reference point of last year we're looking at coming out of that budget in pass, a book-to-bill that was about 1.7 or 1.8 times, does the pipeline you have today support that type of execution?

Well, we do track our pipeline, as you can imagine, once there's what's in backlog, and then there's proposals submitted, and then proposals in process and then opportunities. Of course as you go down that list, you have to make more and more assumptions about what's going to happen there, and so you're relying on historical trends, and frankly, we're not sure that historical trends are going to hold up in this environment. I'm not talking about major changes, but you're making assumptions about win rates and even whether or not proposals are going to get awarded. All of that said, we believe that there is ample business either -- both in backlog and in the pipeline to support the projections that we've talked about so I don't know what else I can say, other than that, but we do feel like there's ample business there.

Okay, great. Wondering also if you could talk to us about the cadence for staffing increases. I imagine we'll see a pick up in staffing modestly in June and then a pretty big ramp through the Summer months. Can you maybe one, validate those assumptions and two, tell us what you're doing to really amplify staffing.

Well, I think actually, Horacio is driving our staffing initiatives there. Whether you'll see the ramp up in June or by September 30, of course staffing is our raw materials, if you will. It's what we need to drive revenue, and we try and manage that in a just-in-time basis so whether or not we get a ramp up as of June 30, certainly you would see one by September 30. Horacio, do you want to talk about what we're doing in terms of ramping up?

I think that's right. What we learned last year if anything, is that against this market, we actually probably started ramping up the staffing a little sooner than we needed to, and so we are quite confident we can do the job we need to do over the Summer of bringing in the staff that we're going to need to get the work started by September 30th, and so, if you look at our capacity to bring in staff, it's well in line, we have a very strong recruiting team. They know what we're doing. We're actually getting very assertive in terms of going after what you would describe as passive candidates in some of the harder-to-find skill sets and the high demand skill sets, and we're seeing good results there, so I think the pattern that Sam described is the pattern that we expect to see, and we still have a couple aces up our sleeve in terms of the lessons learned from our take share initiative last year, which if we needed to or wanted to, we could really redeploy again this summer, but at this point, we're feeling very confident.

Wonderful. One last question. It sounds like the opportunity set in the commercial markets is quite large. Is there any thoughts on doing tuck-in acquisitions to accelerate the pace in that market, or is this something we should expect to be fully organic?

Well as you know, we have not been acquisitive in our past, and I think as we look to the future not only in commercial, but quite frankly across the board, what we've said is that we don't have acquisitions baked in as part of our growth strategy. On the other hand, we have a rather robust business system, and if there are some strategic opportunities that would fit in nicely that we think could integrate well without doing anything to damage or our operating model or our culture, we would strongly consider that, so we certainly haven't built them in, we don't rule them out and I think we're always looking for, I would call them, rather unique opportunities in small slices, as particular talents, particular skill sets, client access, whatever that may be, and we actually evaluate that across the board, so we'll see what presents itself, and right now, we're open to whatever the appropriate course of action might be, as it presents itself.

Great. Thanks for taking my questions, guys.

Sure.

Mike Lewis with Lazard.

Oh, good morning. Thanks for taking my questions. Two questions for Horacio, and then two questions for Sam. First, Horacio, if we look at the cyber market, and you look at the contract base, what proportion of your cyber work is embedded in current contracts that have new cyber work, and then specifically, contracts that you've received that are solely cyber-related work? I'm trying to figure out how much of your work is embedded.

I don't know exactly how to answer that question. As you know, a lot of our work comes from contract vehicles that have scope around information technology that allow us to do cyber work inside those vehicles, and we have a good number of that really across the entirety of our client base, across all parts of the government, and then in addition to that, especially in the intelligence community, but now really more broadly across, we're seeing contracts that are dedicated to the cyber mission, so it's really a blend of both. We don't look at the business that way to try and figure out what it is and what it isn't.

The other thing is one of the, as we've discussed in the road show and other settings, one of the nice things about our business is we have a large variety of contract vehicles, and so clients that have a mission to accomplish have multiple ways of approaching Booz Allen depending on exactly what they're trying to get done, and how they are trying to get it done, so the thing you can rest assured about is that if a client has something they need done around cyber, it is quite likely that there is a good way for them to approach Booz Allen that is convenient to them, that they can put money on, whether it's one of their contracts or a government-wide vehicle, so we feel well-positioned from a vehicle standpoint to serve the cyber mission of our clients.

I agree. I think that you hold all the important cyber contracts. I'll shift gears here. With regard to recompetes, over the next 6 months, are there any specific recompetes that we should be tracking more closely?

Again, we have not, of course we don't have a long history, but we have a policy of not commenting on recompetes. The average age of our backlog is somewhere between 3 and 4 years, so we constantly have lots of recompetes going on. The great strength of Booz Allen Hamilton is its diversified business base. If you take a look, we have some 4,000-plus active task orders at any one point in time. I don't think any one task order is more than about 1% of our business, if that much, so while we have lots of recompetes going on, A, we have an outstanding record of winning those recompetes, and B, we're pretty formidable competitors, so we feel like we'll do just fine.

Okay, I think you just answered that you didn't have anything north of 1% out there on the recompete side.

Well, right. In terms of the active task orders, yes.

Of course, and Sam, just one more question for you. If we look at the margins in Q4, they were obviously very strong. As we progress through the fiscal year 2012, do you believe that Booz Allen can progress to say a 20% fixed price base within the revenue mix?

Again, the contract mix, we don't set out to say, let's go do more fixed price contracts. Given the nature of what we do, solving our clients' most pressing problems, they are dictating the contract mix that we're looking at, so I think what you're seeing is the government's emphasis on fixed price contracts, which is fine with us, so whether it would get to 20%, golly, we're not anticipating that sort of a change in mix, but as I say, in terms of margin guidance, we do feel comfortable in terms of our 10 BPs per year.

Okay, so we should assume levels of equivalent to where we are today that will get you to 10 basis points if we see a significant acceleration of fixed price work, there could be upside to margins. Is that a way to look at this?

That's fair. That's fair.

Okay, thank you. Great job in the quarter.

Thank you.

And that concludes today's Q&A portion of the conference. I would now like to turn the call back over to Booz Allen Hamilton's CEO, Ralph Shrader, for closing remarks.

Well thanks, everybody. I appreciate your time and attention here this morning. We hope that we have been able to answer your questions. Obviously, I'd like to just sort of summarize what I think were the key items of the day, and I think on a look-backward basis obviously, we're very proud of the fact we had a strong fourth quarter and our fiscal 2011 was very strong and we had significant revenue and earnings growth over the prior year and I think we're very pleased with that and I think going forward, even though we are facing what we think are some uncertain times in terms of the federal process, we believe again that our past history of doing well during times of change and the management consulting heritage that we have and how we build upon really working with our clients to help them through these times of change, the collaborative culture and everything else, will once again enable us to do well in a challenging market, so we're very optimistic there about what the future holds.

And our key plan is we're going to build on our US Federal Government business. That is our core, and we expect to achieve growth across-the-board in all of our markets that we serve in the Federal Government sector and then we have, we think is a great opportunity, really, in this commercial and international space in particular, as the non-compete expires, and so as we look at all of that, we're feeling I think at this point very good about certainly where we've been, and optimistic about where we're going in the future, so that said, I thank all of you again for your time and hopefully we'll have the opportunity to discuss things with you in more detail as the opportunity presents itself so thanks very much.

And thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.