Booz Allen Hamilton Holding Corp (BAH) 2012 Q1 法說會逐字稿

Welcome to Booz Allen Hamilton's earnings call covering first quarter fiscal 2012 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 to Mr. Curt Riggle.

Thank you, Larry, and thank you all for joining us today for Booz Allen's first quarter fiscal 2012 earnings announcement. I'm Curt Riggle Director of Investor Relations and with me to talk about our financial results 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 Press Release on our first quarter earnings that we issued earlier this morning. We have also provided presentation slides on our website and are now on slide 2. On today's call Ralph will provide you with an overall of overview of our business performance and strategic positioning. Sam will then discuss our financial results in detail including our income statement, balance sheet, cash flow and backlog. Ralph and Sam will discuss the guidance we previously provided 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 2012 first quarter earnings release, and in our SEC filings.

We caution you not 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 of our non-GAAP measures to the most comparable GAAP measures in our fiscal 2012 first quarter earnings release and in these slides.

It is now my pleasure to turn over to our CEO Ralph Shrader and he will start on slide 4.

Thank you, Kurt. Good morning, and thank all of you for joining us. I think we all agree it's certainly been a wild time with the debt ceiling debate going to the brink and beyond and then the recent volatility in the global markets. At the beginning of last week, we were reassuring our employees that we have adequate resources to continue to operate on a non-interrupted basis for the short time we expected it would take Congress to reach agreement on a compromise bill. Fortunately, that immediate crisis was resolved. Likewise I want to reassure you, our investors, that Booz Allen's strong balance sheet and diversified contract base enable us to ride out political storms.

I'd like to talk this morning about a good news story. Booz Allen is off to a strong start in our new fiscal year 2012. Building on our uninterrupted winning streak of two decades of organic revenue growth as well as solid top and bottom line performance since our successful IPO last November. We are continuing to grow in all of our major markets across our core US federal government business; and that's defense, intelligence, and with civil agencies, despite the challenging federal government budget environment. The federal government represents the core of our business today and remains the focus of our business strategy for the future. We continue to have confidence in this large, important federal government market.

Last week, on July 31, 2011, the non-compete agreement between Booz Allen Hamilton and our spinoff, Booz & Company, ended; and our firm may now access all markets and clients worldwide. While we now have the opportunity to serve an expanded client base, our strategy for expansion beyond the US federal government market is very targeted and focused on what we believe is our sweet spot. That sweet spot is serving commercial companies in the financial services, health and energy industries where we see strong intersections between public and private sectors. Internationally we see the strongest opportunities in the Middle East and are focusing our non-US business there.

I'll say more about our strategy and outlook in a few minutes. But first let's look at the highlights of our fiscal 2012 first quarter, which ended on June 30 of this year. Here are the headlines. Our first quarter fiscal 2012 revenue increased to $1.45 billion, up from $1.34 billion in the first quarter of our fiscal 2011. Net income for the quarter increased to $51.1 million from $28.2 million the prior-year period. Adjusted EBITDA increased to $122.9 million for the first quarter. Adjusted diluted earnings per share increased by $0.07 for the quarter to $0.41 per share.

On a year-over-year basis, we also grew our total backlog to an all-time record of $11.2 billion as of June 30, 2011, which is the closing day of our first quarter. That's up from $9.5 billion in the prior year quarter. This backlog increase of 18% from the prior-year period shows continuing strong client demand for Booz Allen's services and our ability in a highly competitive marketplace to target and win new work and successfully defend our existing recompete contracts. On our last earnings call, Sam and I talked about the successful renup refinancing of our long-term debt at lower interest rates, as you can see the positive impact of this on our income statement, balance sheet and cash flow.

In terms of recent developments, our steady win rate of new contracts across markets and very strong growth in health and cyber underscore Booz Allen's position as a consultant of choice to clients on their most important missions. Among our major wins this quarter are a prime contract award for the Veteran's Affairs Transformation 21 Total Technology, or T4 program. A large contract with the US Department of Justice to help modernize information technology infrastructure across the law enforcement community. And a major contract to support the Navy Space and Naval Warfare Systems Center Pacific with cyberspace science, research, engineering and technology integration.

We continue to earn recognition as an employer of choice, most recently as a Best Company for US veterans, and we retain our strong commitment to sustainability and to our communities. Booz Allen is proud to sponsor the upcoming display at the National Museum of American History commemorating the 10th anniversary of the September 11 terrorist attacks. We lost three of our employees who were working with our Army client at the Pentagon that day and we will never forget.

In other recent developments, we dealt with some unexpected issues including our disclosure on July 12 that the posting of certain data files related to a government learning management system on the Internet was the result of an illegal attack against our firm. We have been working very closely with our clients to understand the impact and mitigate any potential damage, and cooperating closely with law enforcement to prevent similar attacks in the future. Based on current information we do not expect the cost of remediation and other activities directly associated with the attack to have a material effect on our financial results. The illegal attacks on IT systems at major companies and government agencies are epidemic. We are using what we've learned to redouble our own protection and to apply that knowledge to further improve the cyber protection of our clients.

Concluding our recent developments on July 29, we successfully completed the sale of our state and local Transportation business to CH2M Hill for $28.5 million. Sam will now take us on an in-depth look at Booz Allen's first quarter fiscal 2012 financial results and then he and I will finish with a discussion of our outlook for the future.

Thank you, Ralph. And good morning to all of you. Thank you for joining us. I have the pleasure of telling you more about Booz Allen's fiscal year 2012 first quarter results.

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

With that context, let's turn to slide 5 for a closer look at our first quarter of fiscal 2012, which shows a 7.8% increase in revenue over the prior-year period. This top line growth was enabled by the continued receipt of funding under existing contracts and new contracts on all markets and resulted from the deployment of additional consulting staff against this funded backlog and related increase in billable expenses. In the first quarter of 2012, operating income increased to $98.1 million from $88.7 million in the prior-year period. And adjusted operating income remained essentially the same at $109.1 million compared to $109.3 million in the prior-year period.

Now, adjusted operating income for the first quarter of 2012 was flat compared with the first quarter of 2011, because the income generated by the increased revenue for the current quarter was offset by rising expenses. These expense increases were primarily related to business development and unbillable staff compensation costs as we prepare for the expected increase in backlog during the second quarter of fiscal 2012, and the subsequent growth anticipated in the third and fourth quarters. These expense increases were attributable to an increase in the volume of business development opportunities pursued in the first quarter of fiscal 2012, and are the result of the compressed timeframe between the lifting of the continuing resolution this past spring and the end of the government fiscal year on September 30, 2011. The continuing resolution was lifted earlier in 2010.

The difference between operating income and adjusted operating income was due to changes in stock-based competition expense and amortization of intangible assets related to the July 31, 2008 transaction with Carlyle Group. Net income increased to $51.1 million from $28.2 million in the prior-year period, and adjusted net income increased to $58 million from $41.7 million in the prior-year period. Adjusted EBITDA increased 1.1% to $122.9 million in the first quarter of fiscal 2012, compared with $121.5 million in the prior-year period. Again, this is the result of an increase in expenses incurred primarily related to marketing and bid proposal costs and unbillable staff compensation costs. In the first quarter of 2012, diluted earnings per share increased to $0.37 per share from $0.23 per share in the prior period, while adjusted diluted earnings per share increased to $0.41 per share from $0.34 per share in the prior-year period.

Okay. We all love cash and year-over-year, quarter-over-quarter, Booz Allen has a very good track record of generating cash. Net cash provided by operating activities in the first quarter of fiscal 2012 was $53.8 million, compared to $10 million in the prior-year period. Free cash flow was $36.2 million in the first quarter of fiscal 2012 compared to a minus $6.2 million in the prior-year period. The primary driver of this increase was the reduction in interest expense as a result of the refinancing of our credit facilities. We talked about the debt refinancing of our two prior earnings calls, and as Ralph noted, you can now see the very positive effect of reduced interest costs hitting our books. While we continue to generate strong cash flow, I should point out that going forward, we will require more cash for payment of taxes.

Those of you who have followed our firm since our IPO are familiar with the net operating losses on our books related to the Carlyle transaction in 2008. We expect these net operating losses will be used up by fiscal 2013, and starting this year, our use of these NOLs will be limited such that our cash tax payments will increase this year by approximately $100 million. Booz Allen, like other successful companies, is always looking for the best ways to deploy its cash. We expect to pursue our plans to pay down additional debt and we will continue to evaluate all options for the future use of our cash.

Turning to backlog, our total backlog as of June 30, 2011 was $11.2 billion, an all-time high, compared with $9.5 billion as of June 30, 2010, an increase of 18%. Priced options under existing contracts in the first quarter of 2012, increased by more than $1.5 billion compared to the prior-year period. Unfunded backlog increased to $3 billion as of June 30, 2011 compared with $2.6 billion as of June 30, 2010. Funded backlog as of June 30, 2011 was $2.5 billion compared to $2.6 billion as of June 30, 2010. Funded backlog this year was impacted by the repeated use of continuing resolutions to fund the government and a threatened government shutdown, which was finally 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. This resolution came nearly 4 months later than the resolution in effect during our fiscal 2010.

Now, I'd like to turn back to Ralph who will talk briefly about our strategy going forward and then I will finish the formal part of our discussion with a look at Booz Allen's guidance for fiscal 2012. We are now on slide 6.

Thank you, Sam. Booz Allen's strategy remains focused on quality growth, not growth for growth's sake. We see quality growth as important work for Booz Allen brings differentiated value to our clients on Missions That Matter. Missions That Matter is the theme of our recently published annual report; and if you haven't read it, I hope you will, because it talks about the important work Booz Allen does to help our clients succeed and ultimately help make the world a better place.

For example, our work on new battlefield technologies for the Department of Defense helps save the lives of our servicemen and servicewomen. Booz Allen is working to advance the quality and efficiency of healthcare through the adoption of health information exchanges. We've applied our expertise in cyber technologies to help commercial banks detect fraud and money-laundering activity. We've developed a novel methodology for disrupting illicit supply chains. This kind of vidal, preeminent work will continue to form the core of Booz Allen's business. And with the expiration of our non-compete agreement last week our strategy is to help commercial companies in finance, health, and energy and government clients in the Middle East achieve their most critical objectives.

This is a very interesting and exciting time for our firm. Were opening new offices in New York, expanding our presence in Abu Dhabi, and hiring the best and brightest talent in cyber, health, information technology and other growth areas. We're growing smartly with a focus on strategically important differentiated work for our clients, and a focus on maintaining our unique culture and operating model internally. We expect this focus on quality growth enabled by our single P&L and culture collaboration will continue to deliver results for clients, our institution, and our investors. For our guidance numbers, I'll turn back to Sam.

Thank you, Ralph. We are now on slide 7. In June, we forecasted top line growth for 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 quarterly pattern we experienced in our fiscal 2011. This is in line with US government's historical timing on 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.

We are seeing these expected trends play out and are reaffirming our guidance for fiscal 2012 growth. Specifically, diluted earnings per share is expected to be in the range of $1.40 to $1.50 per share and adjusted diluted earnings per share is expected to be in the range of $1.55 to $1.65 per share. These forecasts do not include any gain from the recently completed sale of our state and local Transportation business, and reflect expectations that bottom-line performance will continue to benefit from reduced interest expense and an improvement in operating margins. These EPS estimates are based on fiscal 2012 estimated average diluted shares outstanding of approximately 143 million shares.

In terms of recent developments, Ralph mentioned the sale of our state and local Transportation business to CH2M Hill, which closed on July 29. This was a very small part of our business representing approximately $50 million a year in revenue. State and local Transportation work did not fit our core strategy, so the sale to a well-regarded company like CH2M Hill was a win-win for both companies, our clients, and our employees. The foreground revenue from state and local Transportation work does not change our revenue guidance for fiscal 2012. And now I'd 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 your questions. Larry, can you please provide instructions for those on the call?

(Operator Instructions) And our first question comes from the line of Nathan Rozof of Morgan Stanley. Please proceed.

Hi guys, good morning. Thanks for taking my questions. I realize it's only been a few short weeks since the noncompete expired with Booz & Co., but can you give us any more insight into the activities that have been underway in the commercial, international markets since the end of July? Specifically have you been able to make any progress in terms of new deal signings or reconnecting with some potential clients in that space?

Hi, it's Horacio. We're talking about 8 days, 5, 6 business days, so it's hard to say what happened in the last 6 weeks, say, versus the months prior. But we have been in contact with commercial clients all along and working with them on cyber issues, where as you know we had to carve out in the prior, when the noncompete was in place and the conversations with clients, the work that's going on, everything points to very exciting opportunities for us along the lines that Ralph described earlier in terms of our sweet spot, the places where we have either leading-edge thinking coming out of our government work or the intersection between public and private sectors.

Lots of opportunities in financial services, lots of opportunities in health and energy. Good opportunities in the Middle East where we have active ongoing conversations, so we're feeling good that we're on the right path and the right strategy and I think we'll have probably more to say in upcoming calls.

And Nate, I would simply say that we didn't really view August 1 as being sort of a flag down, charge ahead. We were continuing on on the same path that we had been on, the same trajectory and everything else. And I don't think I can point to something specific that's happened in the last week. I can just simply say that I think we're just continuing to gain momentum against the targets that Horacio just described; and I think we expect that to be a gradual acceleration now that we have the impediments gone.

Okay. That's very fair. Very fair. I just wanted to see though if you could give us potentially any more insight into the go-to-market strategy in the financials, health and energy verticals. I know that we've talked in the past about cyber being the tip of the spear, particularly in the financial space, but if you could give us any more insight into maybe health or energy -- I believe health is growing very quickly for you guys -- that would be helpful as well.

Our health business primarily focused on the government side is growing very quickly on the back of some major wins that we described earlier and just general momentum around regulation reform and so forth. We're very excited about that business on the government side.

In addition to that, on the commercial sector we are having active conversations; and they're not that different from the conversations on financial services in terms of we have some unique capabilities and some unique knowledge starting with cyber and now branching out to other areas; and we're seeing good opportunities, good conversations, and really, the continuation of something we started about a year ago.

Great. Thank you. And last one for me before I turn it back over, you guys did a very admirable job in backlog this quarter. And I was wondering if you could give us any insight to what you're seeing on the ground perhaps since the quarter ended in terms of increased activity with the contracting officers. And how that might translate into backlog trends going into the fiscal second quarter related to normal seasonality. Do you guys expect backlog to grow faster than normal seasonality in terms of quarter-over-quarter or just if you can give us any insight into what's happening on the ground there?

Thanks, guys, and congrats.

Nate, we are seeing what we expected, which is that the pace of awards is quickening, so we do expect to see an increase in backlog quarter-over-quarter by the time we get to September 30.

Clearly, the discussions around the debt ceiling didn't help, because as you know, with the government contracting shops, when there is uncertainty, they'll tend to hold their fire a bit, but we are seeing an increase in the number of awards. We're seeing good funding, and so what we expect to happen, what we expected to happen appears to be playing out. So we're pretty optimistic about what September 30 will look like and we're optimistic about the second half.

Thank you.

Our fiscal second half.

Got it.

Our next question comes from line of Joseph Campbell of Barclays Capital. Please proceed.

Good morning, Ralph, Horacio, Sam, Curt and Kevin. It's Joe Campbell and Carter Copeland at Barclays; and we just wanted to add our congratulations on good results in a tough environment.

On a nonfinancial note, for those of us here who lived through September 11 in New York and for those who didn't, we just wanted to say thanks for your support of the memory of this day. Ralph, the President announced the new cyber policy with 5 different initiatives; and I wondered if you could share with us how you see this policy changing or enabling the various, already ongoing, cyber activities at Booz, and how you might take advantage of whatever is changing as a result of this initiative?

Well, I think that the most important thing that actually occurred -- that did, Joe, was to actually focus more attention on this issue. I think there have been, what I'll call, an informed group of folks both in the government and in the private sector that have been concerned about this for a long time.

Unfortunately, it's the kind of thing that has traveled below a lot of radar screens. And the most recent activity of the group of Anonymous, for example, in terms of their hacking into the various computer systems and also the revelation over the weekend about being into the law enforcement agencies, the FBI, the IMF, everything like that, has I think finally got people's attention that, hey, this is really not a group of kids out there that are playing videogames. It's now something that has serious impact on the health, safety, and welfare of all of us.

And so having the President come out with a statement, actually the substance of the statement was not as important to me as the very fact that he issued this thing. And now we have an opportunity I think to sort of have a lot of folks in the public and private sector rallying behind initiatives here and I think that will add great momentum, if you will, to the kinds of things we're doing.

We are already seeing an increased interest and an increased emphasis on this from our clients and potential clients, so I think the momentum is simply building; and certainly having the President with his bully pulpit talking more substantively about things to be done will greatly assist us actually in moving forward with our initiatives.

Ralph, on that same note some people had commented that the President was relatively silent on the fact that there is an offense part of this as well. Did you find that the policy as stated was controversial or more or less the purpose of it was simply to elevate the priority of the entire offensive, defensive, and maybe just awareness?

Yes, I actually tend to word your latter point of view there. I think either there's always concerned, Joe, when you start to really dig in and you understand how effective cyber security is executed. In order to provide defense, you really have to understand what the offense is all about. It's like, my analogy is, always around sports. It's like football. You really don't know how to set up the defense unless you know what the heck an offense is going to do.

But on the other hand, from a national point of view, I think the President really needs to be in a place where he talks more about how we're trying to defend ourselves against this rather than emphasizing the offensive capabilities that need to be developed in order to actually have a full repertoire of skills. But I don't think it would be seemly actually for the President or another high-level government official emphasizing offensive capabilities.

I think again those people who are knowledgeable and in the know are well aware of what it takes to actually have a full and complete understanding and actually be able to execute the mission; and I think that's really quite sufficient for now.

Great. Sam, just a couple of financial ones. Could you comment a bit more on this unbilled staff compensation? This was expensed or is it sitting in unbilled receivables? And we're wondering what impact it had on the margins in cash flow.

Well, good question, Joe. Thanks for asking that so we can clarify that. I understand the confusion around unbilled. What that represents is, we are, much like we did last year, building staff in anticipation of a surge in funding as of the end of the government's fiscal year. So if you take a look at our headcount year-over-year, headcount is up about 5%.

So what that says is that we're farther along as of June 30 this year in terms of building staff for the back half growth than we were last year. Particularly we are hiring staff in the growth areas of cyber and health care, for example. As you can imagine with cyber, a lot of that work is classified, so when you hire staff, of course you have to go through the process of either getting them cleared or getting their clearances transferred. And while that's going on, it's hard to get the billable.

So none of that cost is on the balance sheet. It was all expensed as an indirect costs during the first quarter. As you know, we manage our indirect rates, those that we use for pricing particularly on our cost plus work. We manage that on an annual basis. We've accommodated that in our annual indirect expense plan, so there are no surprises to come from that. And that really represents staff that we have available to deploy as the funding comes in.

Thank you, Sam. Just another small one, the 7.8% revenue growth you posted in the quarter was really toward the high end of what you could call mid-single digits. And I'm sure you were pleased given the guidance. But since you've continued to say the first half will still be mid-single digits, are you just being conservative here, or should we be expecting that Q2 will be somewhat weaker than Q1?

Well, as I'd mentioned earlier, we expect the quarterly patterns to be the same, so if you go back to last year's second quarter, in fact the revenue growth rate in the second quarter was below that of the first quarter. There are a couple reasons for that.

One, lots of staff want to take vacation during that --in that September quarter, and two, the government and our staff are very focused on both prosecuting proposals and getting awards and doing all of the marketing attendant to that. So there's lots of business development activity going on during that quarter.

So if you look, I think traditionally you'll see first quarter a little higher than second quarter, and third quarter and fourth quarter rebounds, so the average of the second half will be higher than the average of the first half.

Thank you, Sam, and again congrats to all on a good quarter.

Our next question comes from the line of Bill Loomis with Stifel Nicholas. Please proceed.

Hi, thank you, good quarter. Just calculating the awards, again at $1.7 billion, or $1.2 billion, book to bill, just want you to confirm that. Did I calculate that right?

That's the way we calculate it, Bill, and our calculation is very simple. We take the growth in backlog and divide it by the revenue for the quarter, so -- (multiple speakers)

Okay. So just looking at peers, both A&D, IT units and smaller companies, they're having awards dramatically lower, $0.2 billion, $0.3 billion, $0.4 billion. How is Booz Allen able to have that kind of award activity in this environment? Can you give us a flavor of how much of this is market share gains? Because obviously, the macro environment's pressured quite a bit.

Yes. I tell you, we've always -- I think the last time we did an in-depth look at market share capture was actually in government fiscal '05, I believe it was because it's quite an arduous process. But I think at a macro level, clearly our adjustable market is not growing that fast, so we believe we are taking share.

I can't tell you that we've got an in-depth analysis to prove that, however. So again, we continue -- look, we've had, what, at least 18 uninterrupted years of organic revenue to growth. We attribute that to our business model, particularly our culture that focuses on a very collaborative environment which brings the best that we have to offer to all of our clients.

We operate this, as we've chatted with you before, Bill, we operate it with our partnership culture, with partners helping partners. We feel like that gives us great strength and great agility. We believe that that will continue to serve us well as we go through these very turbulent times.

Being agile, understanding your client's mission, understanding, not where the money is, but where the money's going to be has been one of our hallmarks and we think that's serving us well now.

And then just the revenue, can you give us the revenue break in growth between defense and intel civilian like you do for the year? Any way we can get that for the quarter?

As you know again, focusing on individual markets is counter to our culture, which says we move partners and staff freely from one market to the next. So we've tried to shy away from talking in terms of growth levels by market, shying away from profitability by market because we manage it as one big whole.

That said, I will tell you that we continue to see growth rates in civil and in intelligence higher than in defense but again defense is 50% of our work.

And then on the hiring and staffing, obviously you had a good quarter of awards in the June quarter. How much of the staffing increase is based on awards yet to be won in the September quarter?

Bill, I can't give you an answer on that off the top of my head. We clearly -- again, we have been stockpiling staff, particularly the cyber area and increasingly in the healthcare area. And we do not seem to be demand limited there, so we are expecting big things both by September 30 and throughout the second half there.

We believe those will be growth areas regardless of what happens with the overall federal budget.

Okay. Thanks.

Our next question comes from the line of Brian Gesuale with Raymond James. Please proceed.

Hey, good morning, guys. Again nice job in a difficult environment here. Wanted to circle back real quickly to the Commercial business in that first question that was asked. Wondering, that market has really developed quickly and kind of taken a life of its own, particularly in the cyber domain.

Wondering if, as you've thought about that, whether smalltalk in acquisitions can help facilitate you into the market quicker or if this is something that looks to be a full organic build for you guys?

It's Horacio again; that's a very good question. I think at this point, we are confident that our organic growth path is -- what we are doing, what we know how to do is the way we prosecute the market. I don't think we exclude anything ever, and so, if the right thing came along, we would certainly look at it, and we'll have to see. But I think at this point, first of all, this is relatively early days. We've only really been working back on this market in earnest for about a year. We are now unfettered to all parts of the market for about a week.

When we see more, we'll maybe get a better sense of other things that cannot be done organically. But at this point, we see an opportunity to really develop a Commercial International business that our natural extensions and parts of our core business as opposed to something that sits on the side and has its own dynamics and its own things to happen.

One of the powerful things about Commercial International is not just what they do for our revenue generation, our profits, our financials, but also because there's things we learned there that are of value to our government clients in the same way that things that we learn in the government are of value to commercial clients.

And so that's really what we're focused on is building a business that doesn't have walls and has no frontiers inside of it, and that's really the strategy we're prosecuting. We'll see as time goes by whether either the right thing comes along or we go looking for the right thing but for right now we're sticking to our guns.

Brian, I have to chuckle with what's going on in the market. If you look at some of the valuations of the small cyber companies and then you look at Booz Allen's value, I think I would call that a disconnect, but that's just me.

Very fair point, Sam. Thank you. And wanted to drill down a little bit into staffing. Sounds like you have some staff in front of some orders that are coming and that you've already won.

Can you comment a little bit on the directional movement of voluntary turnover? And then some of the areas where you guys are growing in, namely cyber and some other areas, everyone seems to be looking for folks. Can you talk about if there's a talent shortage in some of those specific skill sets and what you're doing to mitigate that?

Let me try that. We are seeing, it's interesting, all the data we have suggests that turnover is up throughout the industry, and we are seeing some increase in turnover as well. We've been planning for it. We are recruiting aggressively against a pretty strong recruiting plan for the year and you have the numbers in front of you.

Cyber is an area where we're being particularly aggressive in our recruiting, and we have put a full core press and we're seeing very good returns out of that. It's clearly a constrained market, but we have a great brand there, not just with clients, but with talent. And we're taking -- that's a place where if you thought about the talent market as a market, you'd say we're taking share.

The other thing that we're continuing to do is not just buy the talent but make it, so we have a very aggressive internal training programs, and we are turning out our own cyber professionals and our own cloud professionals inside of Booz Allen and in collaboration with universities. So I think we're doing our share to address the talent shortage, and we, I don't believe, are going to be totally constrained on the talent side.

Okay. Great. That's very helpful. Last question and I'll jump back in the queue. Wondering if you could give us any type of quantitative guidance in terms of your pipeline and bids outstanding, and then also maybe some commentary on some renewal activity within that pipeline? Thanks very much, guys.

Brian, we have debated internally. I know there's a number of folks that talk about the value of bids outstanding, and we have lots and lots of bids outstanding. I can assure you of that.

When you start putting values on that, what I find is that you have to make assessments about -- we talked in terms of P-go, in other words, what's the probability that it will actually get awarded? And then there's the P-win, what's the probability that it gets won? And then once it gets won, what does it get funded at?

And all of a sudden, it becomes a web of assumptions and predictions, all of which, particularly in this market, are a bit circumspect -- I'm sorry, a bit suspect. So we've said, we will continue to -- if it's something we look at internally, we watch trends. But in terms of having data that we can put out there and track from quarter to quarter, it's just not something that seems to us to make an awful of the business sense.

So there are an awful lot of bids out there. There's an awful lot of opportunities out there. I think the real issue gets down to which ones will the clients ultimately award and which ones will they fund? So we believe we are positioned well in that market. We believe we will win our fair share and more, but estimating those things at anything that approaches a reasonable number is very, very difficult. I'm amazed at some companies that do it.

Well, your book-to-bill speaks for itself, so congratulations again on a good quarter, guys.

Our next question comes from the line of George Price of BB&T Capital Markets. Please proceed.

Hi, thanks, good morning, everyone. And let me add my congratulations on a nice quarter. A bunch of my questions have been answered but still have a few. You talked about the Middle East for the International business as having some attractive opportunities, and I was wondering if you could just expand on that a little bit, give some more color on what those opportunities are?

We have a very strong set of relationships actually in the Middle East that are built by some of our senior professionals, such as people like Mike McConnell who has an international reputation. And our decision to open an office Abu Dhabi was based on the fact that we were getting a fair amount of pull from nation states over there towards helping them in the cyber security domain.

So our whole thrust has been largely built around cyber security. When we were -- back before we actually separated the businesses out, we did a fair amount of work in that part of the world in helping with, at that time it was more, information technology and information systems work, but we left some people there who are now embedded in the various governments; and we also left some folks there who were working with other companies.

There's sort of a, I'd call it, almost a magnet effect where they're drawing us back and asking us, hey, you used to help us with this, can you help us now? And then I used to work for you, I'd like to come back. I used to work for you and I know what kind of work you do, I'd like you now doing work for the organization I'm part of. So all of those things came together in a way -- as I say, I think Mike helped to be a catalyst to that given his international reputation, so as we put all these things together we saw a fair amount of opportunity over there, and that's why we've opened the office.

And as we've been over there, and we've sent people over there, we continue to find that there is almost a pent-up demand for our kinds of services, the things we do, our reputation, all of these factors are in play; and we're seeing I guess a building enthusiasm for the kind of work we can do.

Again, very much in the technology-based domain, cyber being at the core of that, and it looks to be fertile territory for us. Again, people also tend to worry a lot when they begin to hear about the various instabilities in that part of the world, and I can assure you that working where we are in the Emirates and Abu Dhabi and Ghadeer, and places like that, we're operating in what we'll call the more stable elements there as opposed to some of the places that have been ravaged by a lot of the Arab spring.

So it's a very exciting business opportunity for us and one that we think will continue to grow pretty rapidly over the course of the next several months and years.

Okay. That sounds interesting. Just on the guidance, wanted to be clear. Your fiscal '12 guidance assumes that we begin GFY '12 under CR; and if so, what kind of duration, how do you expect that play out as we move through the beginning of GFY '12?

We expect it to be FY '11, only worse. Clearly, let's call it, the 6 months between September 30 and March 31, we expect it to continue to be turbulent. It is interesting. I think if you looked last year, what you saw -- and if you compare that to the year before -- you saw the government contract and community starting to get used to that, right?

It is a learning organism, so my thinking is it will be a little bit better this year, but I think realistically, we've said, it's going to be heavy politics. There's going to be lots of rumors, lots of assertions, so it will continue to be a turbulent market.

But it will still be a big market, and our clients still have missions to get done, so we believe work will be awarded. We believe work will be done, and we'll get through this. It would be nice if they would just adopt a continuing resolution on October 1. That then gives for the entire year, that then gives the contracting community a good idea of exactly what they have to spend. That's probably the best that we could hope for, but I'm sure that won't happen.

Okay. So you do expect CR and a relatively shorter term CR, something on the order of somewhere in the 3 to 6 month time frame, something like that?

Something along those lines, but clearly I'm speculating at this point as opposed to having deep insight into the Congressional mind so -- (multiple speakers)

Still, our best estimates in planning purposes are around the idea that given the difficulty last year with getting an approved budget, I don't think we've got any better prospects for getting an approved budget this coming year. So if you look at the time frame it took last year, thinking about us finishing out this particularly fiscal year for us, we're very much thinking it will be at best finished under continuing resolution.

Right. Right. Okay. Fair enough. Wanted to ask you also about a comment that you made around civilian and intel versus DOD, seeing better growth opportunities in civil and intel. And just wanted to kind of get your thoughts on why that is. Because on the surface in some cases you've seen much larger cuts taken out of many of the civilian agencies versus DOD. Is it related to the more fragmented nature of civilian versus DOD? Is it what's happening on the drawdowns, other drivers, just curious? Love to get your thoughts on that.

Well, you actually hit the nail on the head in terms of the civil market being more fragmented, but we're seeing very high growth rates in healthcare and in financial services, for example. Other areas we include homeland security and civil. That's not the growth market that it once was.

So, we do manage a portfolio, which is why it's important for us not to focus on individual markets, because we're not stovepiped that way. We do have the ability to move resources around.

I think it's fair to say that in large measure, when we talk about, for example -- again that's why we're hesitant to talk in broad generalities, you hear talk about cutting back on the civil sector overall. Okay, that's a fact. But in reality, places where we are, are actually growth areas, because health is growing very rapidly. Financial services, we're growing very rapidly. So while the overall budget gets impacted, the places where we are is not.

I think in DOD, there has been a general cautious attitude that there is so much handwaving and so much consternation about, oh, what might happen and everything else, it's actually just caused a slowdown in contracting activity.

And again, we feel like we're well-positioned to continue our growth, because a lot of the work that we do is actually to help our clients make their way through challenging times, how they do more with less, how they face the budget contractions and things like that.

But never the less, it amounts to where you're position and how you're position. DOD, if they're going to absorb large cuts, we're going to see cuts in major weapons systems and major platforms and things like that.

That kind of stuff is not likely to have much of an impact on a Booz Allen, because that's not the kind of things we do. So it really is important that you get down to the much finer gradations about what in the market it being affected, what in our market is being affected, not the broad generality about an overall market space.

And again, the ability that we have to float people back and forth across the boundaries allows us to move our resources to whatever is hot. And that's why overall we come out very confident about our ability to prosecute our overall Government business and knowing how to position ourselves well within the various little pieces of it.

Okay. And last quick one, should we expect to see headcount begin to increase in the fiscal second quarter, next quarter?

Well, just to point out, year-over-year headcount is up as of the end of June 30, right?

Sorry, I meant on a quarter-over-quarter basis.

I understand and I just wanted to make the other point, that headcount is up close to 5%, as I recall. So yes, we would expect headcount to be higher as of September 30.

Great. Thank you very much for taking my questions.

Our next question comes from line of Robert Spingarn of Credit Suisse. Please proceed.

I have two questions, one I think for Sam, and one for Ralph, or perhaps Horacio. First, Sam, on the guidance, you had very good margins in the quarter. I think you had a record level of adjusted EBITDA here at $123 million.

And really for clarification, I think you said that with the increased pace of bid and proposal work in this current quarter, sometime in the September quarter, and also maybe some lingering or lower revenue growth in this quarter, because of the focus on the order side, fiscal Q2 should also be weaker on the margin side as well as on the revenue side, and then this is what drives the improvement in the back half of the year?

Again, Rob, as you know, we've tried to avoid providing specific guidance on a quarterly basis, because we don't manage the business that way, frankly. So that's why we've laid out the annual guidance; and we try to provide quarterly updates to the annual guidance. So that said, I think you would expect that this year's fiscal second quarter, in terms, its relationship to the rest of the fiscal year will be similar to what we saw in 2011.

Okay. But I guess said a different way, it looks like your margins were better than expected and frankly a little bit conservative, relative to your guidance. Or rather your guidance is conservative relative to the margin that you showed. That's where I'm going with this.

I understand. And we've laid out our guidance for the year, and we're comfortable with that. We're going to work hard to provide -- to make those numbers.

Let me ask you the question a little differently. What is driving the stronger execution?

What is driving the stronger execution?

Yes, the margin strength that we saw in the quarter.

There's a couple of dynamics actually that we started seeing in the back half of last year, which is, there has been a bit of an increase in fixed price work. Again, those margins tend to be higher certainly then cost plus work and also [ton of] material work, so we're seeing that.

We have had -- I think if you go back to the original IPO, we talked in terms of trying to drive margin improvement on particularly our subcontract costs. Given our consulting heritage, we historically did not pay an awful lot of attention to marking those up. We have started doing that to the degree that we can. Clearly, we've got backlog that we have to work off that's, let's call it, priced under a different philosophy. So those are the issues that are helping us with the margin line.

Okay. So that to me seems like a really positive trend that almost gets lost a little bit with the strong bookings in the quarter relative to your peers.

So second question is at higher level. And again I'm not sure who this is for, but I would guess that you're having a close look, to the extent that you can, at all the various scenarios that could come out of this budget control act. And I wanted to ask you how you see the cuts being directed and would you expect any difference in the direction of cuts for Tranche 1 versus Tranche 2?

I think that when you look at it overall, we have tried to energize all of our senior people in the market to have an understanding about what the impacts might be. I really think it would be presumptuous of us to at this point have a real perspective on how these things might play out in particular 1 versus 2.

From our vantage point, we are still very much involved with a political football here that is bouncing sort of wildly and uncontrollably. And I think, even if one of my guys said, I've got the whole thing figured out, I don't know that I would believe that. It's just, it's too dynamic. There's too much going on.

I don't even think here in DC that there's been any digestion really of the agreement that's been reached. I don't think even think there's a full and complete appreciation about what its impact is going to be. You may recall that when we had the first agreement to get over the hump several months ago, there were big proclamations about how much was going to be saved and everything else, and it turned out that it really had an almost miniscule effect on the current year.

So I think we've got to sort our way through an awful lot more of that stuff. And to try to look at what's already been declared and then what's going to happen after the commission gets together and where that's going to go, it's just wildly speculative at this point.

So I think what we're doing is we're trying to understand what the impacts would be about budget cuts in various segments of the marketplace, and if they occurred, how would they impact us? Because that's really the thing we can relate to. We can't really speculate on where they're going to occur but if we speculative that something might happen across the board and every one of our businesses is geared up and ready to deal with change that might happen in their markets, when it does happen and how it gets portioned out, we are in a position then to respond to that and it's really how we're trying to manage ourselves against it.

Okay. That's a fair answer and I'll just follow-up and I don't know where you can go with this, but do you get any sense as to how this plays out procurement versus O&M?

Yes, see Ralph's answer.

I don't -- it's never beneficial to make pejorative statements but I don't believe anybody has given any thought to anything at this level of detail. We are way up at a very high level handwaving place. And the guts of this, this is one of those things where at some point, decisions are going to be made and they're going to be tossed down to the people below and they're going to be told to implement.

At that point there will be a big scramble about to do it, but at this point we haven't even settled the major things, much less gotten down into the noise where people are going to be looking at it at that level so we actually don't have a clue on that. That's the best thing I can tell you very honestly.

One of the things I learned from Ralph is, you try not to worry about things you can't control and you do focus on the things you can, so what we can do is, we believe that the flexibility and agility has been a part of our success. We're looking for ways to become even more flexible and more agile and be able to move around even faster to capture opportunities, and create real-time response abilities.

And I think that's more of a strategy for us than to try to predict the political process. It will go where it goes; and once it lands, hopefully we've done our job right and we're there to serve our clients. And now with the ability to go into commercial international, not just the US federal government, that gives us additional areas in which to become flexible.

Horacio, would you say you are seeing more interest and requests from the government customer for help in figuring out where the opportunities are to streamline? Do you see that activity rising?

We do see we have a whole thrust around efficiency and effectiveness, not just efficiency. I think one of the -- the whole effectiveness part gets lost here. Missions still need to get accomplished.

As much as we're all upset with the political process and what have you, if any of these led to us feeling less secure or less protected or less well served by the government, that's just not going to be acceptable to people trying to accomplish those missions.

And so we have an entire thrust we've invested some money behind refining our intellectual capital, or collecting all of our intellectual capital in this area. We're having lots of conversations with clients, all the way from the [sign forward] ability, to how to get more use out of the money that's there, to how to be more effective with all of that. And those discussions are resonating with clients from the CFOs of the agencies, to the operators and all across.

Well, thank you for those answers. I think that's a fair perspective and very nice quarter.

With no further questions, I would like to turn the call over to Ralph Shrader for closing remarks.

Well, thank you. And thank all of you. I'd like to just close this morning's call by reinforcing our pride that Booz Allen is off to a great start in our new fiscal year. We continue to grow revenue organically in all of our major markets.

We also remain focused on this quality growth that we talk about, providing high value differentiated services to our clients on Missions That Matter. The US federal government remains our primary focus and we continue to grow this core business despite some very challenging market conditions.

Our new Commercial business will focus on finance, health, and energy thrust, and those are aligned with our Government business in these areas and our International business is going to focus on the Middle East. We are committed to sustained performance over the long-term, and believe that this will it reward our investors well beyond the current turbulent state of the markets today.

I'd like to just close by thanking all of you for joining us this morning and for having some very interesting questions and we hope we've satisfied your concerns. Thanks, and have a good day.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.