Booz Allen Hamilton Holding Corp (BAH) 2014 Q4 法說會逐字稿

Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's earnings call covering full-year and fourth-quarter results for fiscal 2014.

(Operator Instructions)

I'd now like to turn the call over to Mr. Curt Riggle.

Thank you, Shannon. Thank you all for joining us today for Booz Allen's full-year and fourth-quarter fiscal 2014 earnings announcement. I'm Curt Riggle, Director of Investor Relations. And with me to talk about our business and financial results this morning is Ralph Shrader, our Chairman and Chief Executive Officer; and Sam Strickland, Executive Vice President and Chief Financial Officer.

We hope you've had an opportunity to read the press release for our full-year and fourth-quarter earnings that we issued earlier this morning. We have also provided presentation slides on our website. And we're now on slide 1.

As shown on the disclaimer on slide 2, please keep in mind that some of the items that 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 2014 full-year and fourth-quarter earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today, and remind you that we assume no obligation to update or revise the information discussed on this call.

During today's call, we will also discuss some non-GAAP financial measures and other metrics which we believe provide useful information for investors. We include an explanation of our adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fiscal 2014 full-year and fourth-quarter slides.

It is now my pleasure to turn over the call to our CEO, Ralph Shrader. And he will start on slide 3.

Thank you, Curt. Good morning, and thank you all for joining us today, as we look ahead to the Memorial Day weekend, which is the traditional start to summer.

It's been quite a while, in fact it was back in the depths of winter, when we last talked, because this is Booz Allen's fiscal year-end earnings call. Therefore, the interval includes the extra time needed for the fiscal year-end audit. If we turn the calendar even further back, to last spring at this time, we provided you with earnings guidance for fiscal year 2014. And I'm very proud to report that Booz Allen has delivered on that bottom-line EPS guidance, and we have once again exceeded our margin expansion goal.

Despite challenging market conditions, which have affected every company in our sector, Booz Allen has performed well, serving our clients in their core missions and delivering strong returns to our investors. In addition to our earnings and margin growth in the past year, we have delivered $2.40 in dividends during fiscal 2014, which, together with our share price appreciation, represents a total return to shareholders of more than 86% over the 12 months ended March 31, 2014.

This is a special year for Booz Allen. 2014 is our 100th anniversary in business. We are marking this milestone with a series of partnerships with respected organizations that share our values in business, the arts, and community service, including the New York Stock Exchange, the National Gallery of Art, the USS Midway Museum, and the Aspen Institute.

Two weeks ago, I had the privilege to speak at the pre-opening events for a major exhibition at the National Gallery, which showcases the collaboration and innovation of impressionist masters Edgar Degas and Mary Cassatt. We are sponsoring this exhibition to give back to the community on the occasion of our 100th anniversary. And if you're in Washington, DC, between now and October 5, I hope you will be able to see it.

On our last earnings call, I acknowledged that you, as investors, are understandably interested more in our future than our centennial. And I assured you that Booz Allen's management team and our nearly 23,000 employees today are focused strongly on the future. Based on recent contract awards, and our investments in growth markets and capabilities, we believe that we have good reason to be confident in the future. And Sam and I will talk more about that in just a few minutes.

Right now, I want to share the headlines for Booz Allen's fiscal 2014, ended March 31, 2014. Full-year revenue was $5.48 billion, compared with $5.76 billion in the prior year. Adjusted EBITDA increased to $534 million in fiscal 2014, compared with $528.8 million in the prior year. Adjusted net income increased to $241.9 million, compared with $239.5 million in the prior year. Adjusted diluted earnings per share decreased by $0.02, to $1.63 per share.

Booz Allen has always managed our business and made our forecast and earnings commitment on an annual basis. We are committed to continue to deliver solid earnings. We reiterate our goal to continue to expand margins in the fiscal year ahead and we'll provide our fiscal 2015 guidance this morning.

Given our continued strong cash flow generation, we are increasing our regular quarterly dividend by 10%, to $0.11 per share. Our next regular quarterly dividend is payable on June 30, 2014, to stockholders of record as of June 10, 2014. This reflects our ongoing confidence in the future success of our business and our commitment to return value to all of our shareholders.

During the fourth quarter of fiscal 2014, Booz Allen won contracts to perform mission-critical work for our clients across civil, security, and defense markets. Here are just a few of the significant contracts and task orders we won during the quarter: a series of contracts with the United States Army, totaling approximately $110 million to support Army electronic warfare air/ground survivability, Army intelligence and information warfare, ground combat systems modernization, and personnel and pay system support; two major subcontracts to support the US Department of Energy, one worth approximately $150 million for the strategic petroleum reserve, and the other worth approximately $75 million to support the National Nuclear Security Administration; a recompete contract win to continue to support NASA's Johnson Space Center; and, we have also been awarded multi-million dollar contracts from commercial clients in the pharmaceutical and financial services industries.

In the nearly two months since the fiscal 2014 fourth quarter ended, we have seen solid contract wins across our markets and a quickening pace of awards. We believe this reflects the federal government's funding availability and desire to move forward on essential missions to deliver services to citizens and ensure a strong national defense. Service to clients, and to the communities in which we work and live, has been a hallmark of our Firm since its founding. And we have set an ambitious goal for employee volunteerism in this, our centennial year.

The last weekend in April was particularly noteworthy, as Booz Allen supported five different major events that benefited and honored veterans, the poor and elderly in need of home repairs, and young people interested in science, technology, engineering, and mathematics. The events were: the Face of America Bike Ride honoring veterans in which Booz Allen partners and staff rode from Washington, DC, to Gettysburg, Pennsylvania; the first championships for robotics in which eight different Booz Allen-sponsored employee-mentored student teams were finalists; Rebuilding Together, in which some 800 Booz Allen volunteers repaired 45 homes in 29 cities across the United States; the USA Science and Engineering Festival at the Washington, DC, convention center; and several honor flights in which our employees met and assisted veterans who were coming to visit the World War II memorial.

That was just one busy weekend when Booz Allen employees in their red volunteer T-shirts were seemingly everywhere at once. To me it exemplifies the commitment and spirit of service that truly defines our Firm.

Sam will now provide you with a closer look at our financial results for the fourth quarter and full year of fiscal 2014, and the underlying drivers of those results.

Good morning. And thank you for joining us. As we close our fiscal year 2014 and look ahead to fiscal year 2015, I'm very proud of where we're standing at this milepost, on what has been a rocky journey for our industry over the past couple of years. We've managed our business carefully and thoughtfully. And the story we have to tell you today is one of considerable success in the face of tough challenges.

I'd like to start by recapping the chronology of events of fiscal 2014 and the actions we took. As we began our fiscal 2014 in April of 2013, our industry was facing a great deal of uncertainty. We were operating under a continuing resolution. Our clients were unclear about whether or not sequestration would be averted and how it would affect their budgets.

As the year progressed, a government shutdown became more likely. I take great pride in the fact that Booz Allen took proactive action to address the situation head on, to ensure the strength and stability of our 100-year-old institution. We entered the year with a purpose and managed the business very tightly in the first half. That foresight paid off by giving us the flexibility to keep affected staff on the payroll during the shutdown and manage the revenue and income impacts over time.

The incremental positives of the Ryan-Murray budget agreement just before the December holidays, and the mid-January passage of the omnibus spending bill, provided more clarity for the end of our fiscal year. However, as we've seen play out over too many prior years, it took some months before we saw meaningful improvement in award activity and, therefore, the impact will be more of a benefit to our fiscal 2015 than it was to our fiscal 2014.

In our full-year results today, we've demonstrated our ability to navigate those difficult circumstances, meet our full-year revenue projections, and exceed our bottom-line revised expectations. Most importantly, our management of the business allowed us to make planned investments in important growth areas.

As the year played out, we refined our guidance. And each quarter I remind you that we manage our business on an annual basis, because the circumstances and rhythm of a given year will vary. Fiscal 2014 proved once again that we know how to adapt our business and adjust to those annual fluctuations. And we expect to repeat this performance in fiscal 2015.

One thing that is very clear to me is that Booz Allen has emerged from the challenges we have experienced over the last couple of years as a significantly more tightly managed firm. As a firm and as a management team, we have sharpened the skills necessary to be successful in this environment.

I'll talk next about our specific financial results for the year and the fourth quarter, and our fiscal year 2015 guidance. Now, let's turn to slide 4 for a closer look at our full year and fourth quarter of fiscal 2014. For the full year, we saw a 4.9% decline in our top-line revenue over the prior-year period, which was in line with our guidance. The decrease in full-year revenue was largely the result of headcount reductions, as we kept capacity aligned with demand, and the impact of the October 2013 government shutdown that we discussed in our third-quarter call at the end of January.

In the fourth quarter, we saw a revenue decrease of 9.4%. The revenue decline was demand related but also included a reduction in billable expenses, two fewer workdays due to our change to align with US government holidays, and weather that resulted in three full and two partial-day government closures.

In the full-year fiscal 2014, operating income increased by 3.2%. Adjusted operating income increased by 6/10%. EBITDA increased by 2.4%, and adjusted EBITDA increased by 1%. Net income increased by 6%, and adjusted net income increased by 1% over the prior-year period.

For the full fiscal year 2014, diluted earnings per share increased to $1.54 per share from $1.45 per share in the prior-year period. Adjusted diluted earnings per share decreased to $1.63 per share, compared to $1.65 per share in the prior year. On the surface, the decline in adjusted diluted earnings per share is due to the fact that the weighted average diluted share count increased more than the increase in adjusted net income. But when you look at the drivers in more detail, there are some puts and takes that I'd like to point out.

So, let me walk you through the factors impacting the $0.02 year-over-year decline in adjusted diluted earnings per share. Starting with last year's ADEPS of $1.65, the basic operations in the business -- cost management, margin improvements, and revenue declines -- netted us an additional $0.04 per share. Federal and state tax benefits provided an additional $0.03 per share.

Offsetting these positive factors were a $0.03 impact from incremental interest expense, a $0.02 impact from the government shutdown and weather-related US government closures, and a $0.04 impact from the increase in the weighted average diluted share count. Summing up those puts and takes results in a $0.02 decline and gets you to $1.63 ADEPS for the FY14.

The fourth-quarter results that I'll now discuss generally reflect the impact of reduced revenue over the prior-year period and a comparison to a relatively strong prior-year quarter. In the fourth quarter of fiscal 2014, operating income decreased 20.9%, and adjusted operating income decreased 21.9% over the prior-year period. In addition to revenue declines that impacted the quarter, we saw an increase in activities associated with investment in growth areas, which was in line with our announced plan for the year and was intended to enhance our client-delivery capabilities and market positioning as we move into the federal government's next award season.

In the fourth quarter of fiscal 2014, EBITDA decreased 19.2%, adjusted EBITDA decreased 19.8%, net income decreased 14.5%, and adjusted net income decreased 15.5% over the prior-year period. These metrics were driven by the same factors as operating income and adjusted operating income, and were partly offset by the realization of federal and state tax credits for the quarter.

In the fourth quarter of fiscal 2014, diluted earnings per share decreased to $0.30 per share from $0.37 per share in the prior-year period. Adjusted diluted earnings per share decreased to $0.33 per share, compared to $0.40 per share in the prior-year period. The per-share earnings were driven by the same factors as net income and adjusted net income, as well as being negatively impacted by an increase in the diluted share count.

Before moving to the discussion of cash, I would like to briefly touch on the second amendment to our credit agreement that we closed on May 7. We were able to take advantage of favorable conditions in the credit market to extend the maturity of our term loan A, transfer approximately $170 million of debt from the more expensive term loan B to the extended term loan A, and achieve a greater degree of flexibility on many of the terms in the agreement.

Now, let's discuss cash. Our days sales outstanding for the fourth quarter was 60 days, which was an improvement of 1 day over the prior-year period. Now, cash flow generation has been a source of significant strength for Booz Allen in fiscal 2014. Net cash provided by operating activities in fiscal 2014 was $332.7 million, or 138% of adjusted net income, with free cash flow of $311.8 million, or 129% of adjusted net income, a free cash flow yield of 5.7%.

Cash flow during the year benefited from strong cash collections, which were partially offset by an increase in cash taxes paid due to the timing of payments. As a result of this cash flow generation, and the strength of Booz Allen's balance sheet, the Company was able to declare and pay a total of $2.40 per share in dividends during fiscal 2014. Given our continuing solid cash position, as Ralph noted earlier, we are today announcing a 10% increase in our regular quarterly cash dividend, which is now $0.11 per share.

And, finally, on the results for the quarter, let's finish up with specifics on our contract wins. The government shutdown had a notable impact on the pace of contracting awards earlier in the year. But we are now beginning to see government spending pick up.

Our book-to-bill ratio for the quarter was 0.62, a notable improvement over the 0.26 in the prior-year period. And I'd like to point out that our book-to-bill for the fourth quarter of fiscal 2014 was stronger than the entire second half of fiscal year 2013.

Our total backlog at the end of the fiscal year was $9.8 billion, compared to $11.54 billion in the prior-year period. Additionally, our funded backlog saw a modest decline to $2.3 billion, compared to $2.5 billion in the prior year. The decline in backlog is due, in part, to shorter periods of performance on awarded work. In the fourth quarter of fiscal 2014, we've seen the average period of performance, based on the number of active contracts and task orders, decline 10% over the prior-year period.

While we are discussing backlog, I would like to remind you that we take a very conservative view of our backlog. Our backlog is based only on awarded work that results from contracting officer action. Our backlog does not include projected revenue potential associated with work that has not yet been awarded. Additionally, our backlog does not include ceiling values for ID/IQ contract vehicles. Rather, we recognize backlog only when task orders for work are actually awarded.

With this in mind, I would like to add that we were awarded several new ID/IQ contract vehicles since January 1, 2014. And while expected value is not reflected in the backlog, having these vehicles provides additional avenues for clients to access our services, which puts us in a strong position for future growth.

And now, if you'll turn to slide 5, I'll hand the call back to Ralph.

Thank you, Sam. The year-end earnings call always marks a transition point. This morning we have a changing of the guard that is particularly noteworthy. As I announced on our previous call, Sam Strickland, our Chief Financial and Administrative Officer, Treasurer and Director will retire on June 30 of 2014. This will be Sam's last earnings call.

And, in late July, when we report on the first quarter of fiscal 2015, our CFO and Treasurer-Elect, Kevin Cook, will join me for the narrative portion of the earnings discussion, in addition to the Q&A in which he has participated since our very first earnings call following our IPO in 2010. I've known and worked with Kevin for even longer than Sam and have the highest confidence in Kevin's abilities and core values.

Sam has worked with me side-by-side since I recruited him to join the firm over 18 years ago. And his extraordinary talent, dedication, and core values have ably steered our Firm through a period of great change and success. Booz Allen's financial strength and stability puts us in an enviable position in the business community, and for that we all owe Sam a large debt of gratitude.

Our Vice Chairman, Mike McConnell, and two other senior partners, Rich Wilhelm and Bill Purdy, are also retiring at the end of June. These leaders have made invaluable contributions to Booz Allen, and to our clients, and we will miss them greatly.

I was reflecting recently on the first code of ethics that I signed as a Booz Allen partner. It ended with these words: We hold the Firm in trust for generations to come and accept responsibility to pass on a strengthened heritage to our successors. As individual leaders and as stewards of the Institution, I believe each of us at Booz Allen truly takes this to heart.

And it is for this reason I am excited about the future, even as these great leaders transition to retirement. Each of them will continue to be associated with the Firm as a senior executive advisor. We will continue to have the benefit of their great talent. Even more importantly, they have left a strengthened heritage to their successors.

Our next generation of leaders has exceptional talent and depth, including our President and Chief Operating Officer Horacio Rozanski, and our Executive Vice Presidents: Joe Logue, who leads the Defense and Intelligence Group; Lloyd Howell, who leads the Civil and Commercial Group; and Karen Dahut, who leads our Strategic Innovation Group. In all of these markets, and especially through our cross-market Strategic Innovation Group, Booz Allen is investing in the future -- in promising market areas in commercial and international, and in building deeper capabilities in engineering, advanced analytics, cyber, predictive intelligence, enterprise integration, and software development.

These investments are already showing results. In the past year, for example, we codified Booz Allen's thought leadership in data science, creating the Field Guide To Data Science, which was downloaded more than 10,000 times, and the Discover Data Science web-based training course.

We are applying predictive analytics across government and in industries as varied as pharmaceuticals, the airline industry, and professional sports. We have established multiple product lines related to predictive intelligence. And, we're empowering employees to apply innovation to solving problems for clients through novel concepts such as the Strategic Innovation Group's combustion chamber, which is Booz Allen's version of the TV show Shark Tank, in which employees pitch their ideas to leaders to win investment funds to move the ideas forward.

Additionally, given our success to date and belief in the potential for future growth, we plan to add significantly to our in-country presence in the Middle East-North Africa region during the coming year. These are just a few examples of how we're applying leading-edge thinking, and investing in growth platforms that we believe will position us to thrive in Booz Allen's second century.

I'll now turn the microphones back to Sam to talk about our forecast for fiscal 2015.

Looking back once more to the past fiscal year, it was a year of two halves. To position for the uncertainty we anticipated in the second half of the year, the first half required a very tight focus on managing spending, which generated significantly stronger margins in that period. In the second half, as we discussed in our last call, we were well positioned with more flexibility to respond to the government shutdown and the slow pace of awards that followed. Most importantly, we were able to fund important investments in growth areas, such as our innovation agenda in the Strategic Innovations Group and our commercial and international markets.

Drawing upon the flexibility created in the first half resulted in relatively lower margins in the second half. As we look forward to fiscal 2015, the pace of the year likely will be different, as we expect a strong selling season through September and a more measured approach to investment spending in our growth platforms. As such, we would expect the quarterly margins to play out directionally similar to fiscal year 2014, although with lower highs and higher lows.

As we enter the year, we expect indirect spending to be lower in the first quarter, which will lead to higher margins than realized in the fourth quarter of fiscal 2014. We will react to the flow of the year as it plays out. But the important point here is that we intend to manage our indirect costs in relation to our direct labor and to meet the full-year guidance I will now outline.

With that context, let's turn to slide 6 to review our guidance. The fourth quarter of fiscal 2014 saw seasonally strong award activity as reflected in the book-to-bill ratio for the quarter of 0.62. This was stronger than the 0.49 book-to-bill ratio for the entire second half of FY13.

As I mentioned earlier, the receipt of a number of large ID/IQ contract vehicles since the start of the calendar year, while not reflected in backlog, represent a significant opportunity just the same. These facts, combined with a significant increase in total value of submitted proposals for defined work, provide us confidence as we enter our fiscal 2015. For fiscal 2015, we expect a mid single-digit percentage decline in revenue. At the bottom line for the full year, we are forecasting diluted earnings per share to be in the range of $1.44 to $1.54 per share, and adjusted diluted earnings per share to be on the order of $1.50 to $1.60 per share.

With that, let me hand the microphone to Curt so that we can kick off the question-and-answer portion of our call.

Thank you, Sam and Ralph. Before we move to the Q&A, I'd like to note that, as a result of the final analysis of the Firm's earnings and profits for fiscal 2014, there will be no need to update the tax treatment of calendar year 2013 distributions, as shown on our website. Information about the dividends and associated tax forms can be found on the Investor Relations section of our home page at Boozallen.com.

At this time, our President and Chief Operating Officer Horacio Rozanski; and Senior Vice President, Corporate Controller and CFO-Elect Kevin Cook are here with us, as well, to answer your questions. Shannon, can you please provide the instructions for the question-and-answer portion of the call?

(Operator Instructions)

Bill Loomis of Stifel.

Thank you. Good morning.

Sam, just on your comments, just looking at the first quarter, seasonally that's, of course, been your highest margin quarter. Do you think that will -- you said indirects will be lower so is that going to be the high point of the year in terms of margin and we scale it down a little bit as we work through fiscal 2015?

And tied into that later in the year, what type of award activity are you expecting in the September quarter to drive this revenue forecast? Thanks.

There's a couple questions in there.

As we said, we do not believe that our quarterly margins will be -- for the high years, the high quarters last year, which are particularly the first and second, we don't believe they'll be as high as those this year because we are doing more indirect spending. As we talked about, we started increasing our investment, particularly in our growth areas and our capabilities in the back half of fiscal 2014. And of course that spending will carry over into the first half of fiscal 2015.

In addition, I think there will be a more robust proposal and market development season, let's call it, the award season between now and September 30. It seems like there's an awful lot of funding, we believe, that needs to get placed. So, we'll incur indirects there.

So I, think the margins will be down slightly from last year but certainly much better than the fourth quarter.

Okay. And then the bids that you're expecting, should we think about a 1.5 book to bill? Or just roughly what do you need in September to meet this forecast for the year?

I tell you, we've looked at that a couple of different ways, Bill. I think we would look for book-to-bill ratios clearly above 1, but I don't think we've tied it down to a precise 1.5 or 2 or something like that. But we feel like they're going to be robust.

A lot of it will depend upon the period of performance covered in the awards. As we've talked about, we're seeing a decrease in the period of performance for a number of the task orders and contracts that we're winning.

So, whereas before they might give us five years or three years, now they're giving us two years or three years, for example. They've been keeping funding and award activity pretty short. Part of my hesitancy with providing a forecast around book to bill is that I'm not sure what that trend's going to look like by the time it gets to September 30.

That said, of course, we have an excellent reputation in terms of winning our recompetes. So, the fact that we get a shorter period of performance, we'd like a much longer period of performance, but even so we feel like we'll be able to capture recompetes. And the work will continue. We'll just have to go through more contracting activity.

Great. Thank you.

Joe Nadol of JPMorgan.

Hi, good morning, guys. it's actually Chris Sands on for Joe.

My question pertains to the cadence of the revenue growth rates. Is it reasonable to expect that you'll see more year-over-year pressure in the first half, with that moderating in the second half?

Again, we've tried to avoid providing too much quarterly guidance because we do manage it on a quarterly basis. We think it will ramp up during the year. And then of course with the backlog in the back half it should be comparable to what we saw in FY14 in terms of trend lines.

Chris, it's Kevin Cook.

I would also add to that, that in the second half of our fiscal year 2014, we had the government shutdown, and we had three full and two partial shutdowns from the federal government due to snow, which we would hope wouldn't replicate themselves this coming year, which will help our second half, as well.

We did not plan for a government shutdown. Last year we had factored that in. This year we did not plan for a government shutdown. And we're assuming the once-in-a-decade snow season will probably not repeat itself hopefully in 2015.

Right. Can you then provide a little color on the outlook for the direct labor versus the pass-through that's embedded in that mid single-digit decline?

There will not be a significant change in the percentages.

Okay. And then the second question is can you talk about the motivation for increasing the borrowing capacity? Are you seeing more M&A opportunities or is there any specific motivation there?

Again, we did not increase our borrowing capacity. Of course, the debt stayed the same. But we did want greater -- A, we were able to, a modest decrease in our interest expense by moving some of the debt from the term loan B bucket to the term loan A bucket.

And we were able to loosen some of the, let's call it, the covenants, which would enable us to continue to, A, do acquisitions if we wanted to borrow under the -- it makes it easier to borrow under the accordion feature of the debt -- that feature is still there -- and then, B, enables us to do special dividends if we'd like to do some of that.

Again, our priorities around cash have been we would do an acquisition when we found one that, reasonably priced, consistent with our strategy, a good cultural fit. However, if we do not have a use for our excess cash and we do generate a lot, then of course we would pay that out, as well.

Right. I was referring to the relaxing of the covenants. Should we read into that that there's something imminent on M&A or special dividend or something of that nature?

I think what you should read into that -- and of course with M&A and dividends, we would announce those when we have something to announce, basically. I think what you should read into that is that market conditions appeared to us to be favorable in order to effect those changes and so we took advantage of that opportunity.

Fair enough. Thanks, guys.

Jason Gursky of Citi.

Good morning, everyone.

Ralph, I was wondering if you wouldn't go back to slide 5 and perhaps talk a little bit more in-depth in some of those areas where you are making your investments capabilities, particularly cyber, and give us an update on the general environment in the cyber area at this point? And as you look at the list of areas where you're investing, what are the highest growth areas?

Hi, good morning. It's Horac here. Let me take a crack at that.

First of all, I think with this year in particular we are very pleased with the progress that we've made across the board on all of our investments. Our investment strategy is both beginning to pay off and beginning to accelerate. And I think that's an across-the-board statement.

The second point I would make is that, by definition and by design, these are not individual investment platforms. They're wholly integrated. And, so, commercial international investment is powered by what we're doing in advanced analytics and predictive intelligence and cyber and software development.

Cyber and advanced analytics and predictive intelligence are really more one and the same in the way they translate into market success than they are wholly different things. And, so, I would invite you to think about those as integration of activities as opposed to single ones.

Our commercial international business is now getting traction and gaining stability, and is very much on plan with our long-term plan. And they had, as I said, a very good financial year last year. But more importantly, the portfolio of clients is really a who's who list. And the work that's going on there is the quality work and the type of work we would like to see, and it mirrors the other elements on the page.

Engineering has and will continue to be both a growth area for us and an area of investment, particularly in C4ISR where we're seeing success. And the BES, the former DSES acquisition is something we're very pleased with the progress there.

Advanced analytics, predictive intelligence and cyber, as I said, are really more and more one and the same as opposed to different things. Our view of cyber is that it is finally transitioning from becoming -- how big a wall can we build only to discover that somebody can always build a ladder that's taller -- to a much more predictive approach to trying to figure out where and how the bad guys are going to strike, and what we do about it in anticipation of that. And we see that as an industry shift and something we are leading.

And then enterprise integration and software development are two areas where we do a fair amount of work already, and we're consolidating our strength and looking for additional growth.

So, across the board, as I said, we're very pleased with what's been going on and the leadership that our partners are providing to those efforts.

That's helpful. I appreciate that.

The follow-on would be just around the shift that you mentioned in cyber. People are figuring out how to get over the wall and so you're helping them predict where things are going to go.

Can you just dive into that a little bit more and talk about the growth dynamics that you're seeing there and what types of customers are approaching you at this point? Is this going to be a growth area on the commercial side for you over time, or is this going to continue to remain a bit more on the government side?

And then just talk a little bit about the competitive environment there, as well, and whether that's shifting, as well.

I would offer to you that the answer to that is both opportunities in commercial and federal space, and that we're seeing them in equal measure. I read something in the paper the other day that I like, which is there's now two types of companies, those who have been hacked and those who don't know they've been hacked.

And, so, there's a lot of demand for helping both prevent and then remediate. And we're trying to capture it with -- but it's also obviously a lot of competition. We're not the only ones. We've been doing cyber, we believe, for longer than anybody else, and therefore our capabilities are deeper, broader and more advanced.

But we're certainly not the only ones that have figured out that cyber is a growth area. Every single competitor and every single company has either made acquisitions, created growth, created cyber offerings or re-labeled things they were doing before just because they involved computers, cyber. And so that's there.

What we believe we are doing is bringing to bear a deep set of differentiated capabilities, again, around predictive intelligence and around wrapping around that all of the other services in a way that nobody else can do. And we're dipping into a reservoir of knowledge and talent from all of these years of work in the intelligence community and across defense to then translate those capabilities into something that is broader and works across the broader market, including commercial and international.

Okay. That's great. Thank you very much.

Tim McHugh of William Blair.

Just following up on that a little bit, can you talk about your margin expectations? Is the commercial business getting big enough or growing fast enough now that that's part of, either for this year or the next two or three years, where that can start to impact your margin in a noticeable way?

Hey, Tim. It's Kevin.

Yes, that's been part of the plan since our noncompete ended back in the summer of 2011, is to get back into the commercial and international market due to the relationships we've had there in the past, plus the margin opportunity. And as Horacio and Sam have talked about, we're actually accelerating in those two markets. And that will be a component of our opportunity to reach our margin expansion goals in FY15.

Would you still tell us to think about 2%? Can you update us on the size of the commercial business, maybe what you're expecting for 2015?

We've grown from 2% to 2.5% in FY14, so I'll go out on a limb and say maybe 3% in FY15. But we've said all along that we want to grow it smartly, not necessarily see how fast we can do it. We want to deliver the right capabilities to the right set of clients. We've held to that strategy and it's beginning to pay off.

Okay. And then lastly, just on your commentary about the selling season starting to pick up, or you're being more encouraged about the pace of it, just at a high level that's more bullish than we've heard about from some other government contractors and consultants.

I don't want to ask you to speak for them, but do you feel like -- you're reporting a month later than others -- have you just seen more of the year and we're getting closer to the year-end period and so that's what we're seeing here? Or do you feel like there's something maybe about market share or something else that you probably have a more positive outlook than others?

I think if we look at our proposal activity, certainly it started accelerating in the April time frame. So, maybe reporting slightly later had something to do with it. But there is a very meaningful increase in proposal activity compared to last year.

Now, I tell you what, some folks report out proposal pipelines and proposals and prep and so forth. Those numbers are so variable, let's call it, that I've always been loath to talk about that other than to just discuss activity trends. So, the trend is up substantially there, whatever the value ends up being.

Because as you know, you get a client that wants to put out something for $100 million, we'll end up funding $20 million. So who knows. During the proposal phase it's always a wild guess anyway.

But I do think both in terms of the number of proposals and the volume of proposals, we've seen a marked increase really starting to ramp up, let's call it, the April 1 time line. And it's starting to accelerate. So, we're moderately optimistic about the selling season between now and September 30.

Tim, if you go back to our January call, it was about two weeks after the omnibus spending agreement was passed. There was a lot of people in the marketplace expecting immediate awards. And I think if you look back at our transcript you'll see that we talked about a 90-day ramp that we've seen historically when we come out of these types of situations.

So, if you take that time frame and you add it, at 90 days, you're really looking at the April time frame. It really does hold true that it takes the procurement machine a while to ramp up after the funding is authorized. So, I think that's at play here, as well.

Okay. Thanks.

Ed Caso of Wells Fargo.

Good morning. Congratulations.

I was hoping you could talk a little bit about these periods of performance, if it's particular to a particular end client group, say, Intel versus Army versus Navy versus civil, any color you can offer there?

Not really, Ed, honestly. At least I didn't cut to it that level.

Curt, I don't know if you've got any insight or not.

Ed, this is Curt.

The data really is generally across the board. So, it's not a particular client environment, it's just across the board with the government.

Okay. And can you also talk about your win rates. Obviously growth is very dependent on take-away, so I was curious of your increase in funded backlog, how much of that came from renewals versus taking away business from others. Thank you.

First, let me just disagree slightly. There are new starts. In other words, there is new work. One of the reasons for our substantial investment in what Horacio outlined in terms of where we think the growth areas are going to be, there's a reasonable amount of that that's going to be new work and not involve taking share from folks.

The reason why that's important, as you know, it's gotten reasonably price competitive on, let's call it, long-standing work. So, the investment in growth areas I think for us is important because, A, it is new work and, B, it tends to be, let's call it, more value priced. And in terms of our win rates, I don't think they've changed meaningfully from our historical.

Great. Last question -- tax rate was lower this quarter. Any special adjustments?

I'll let Kevin chime in.

Ed, we qualified for the federal R&D tax credit and some state tax credits in the quarter. For our fiscal year 2015, I would encourage you to use 40.5%, which is our historic tax rate, for a couple reasons.

The federal R&D tax credit has not been extended past December 31 of 2013. So until Congress does that, we can't take advantage of it.

And we need to qualify on an annual basis for some of the state credits. So, there could be some benefit as we go through the year, but for planning purposes we've assumed the historic 40.5%.

Great. Thank you.

Ed, I will say it's my understanding that the House wants to make the R&D tax credit permanent and the Senate wants to do it for two years. So, I'm hopeful that out of that at least we'll get one year, a one-year extension on that. But who knows with the political process in this town.

Suzanne Stein of Morgan Stanley.

Hi, this is Denny on for Suzi Stein. I just had a quick question on your revenue per consulting employee. It was up 3% this quarter, which was the best quarter of the year.

And I was curious if this was a sign of better pricing, maybe a mix shift towards some higher value services, or maybe a side effect from the shortening length of the programs? What caused this increase in revenue per employee? And then how would you expect this to trend going forward?

I think it's probably more a function of the billable expenses than it is -- I don't think we've seen a substantial increase in, let's call it, the revenue driven by each labor hour delivered, for example. We have gotten more efficient in terms of utilization of staff. But I think this fourth quarter -- that was taking hold in the fourth quarter of last year, as well.

Okay. And then your outlook for 2015 was a little bit lower than we had thought. We thought it would be closer to the more flattish for the year.

And I was curious if your guidance was reflecting uncertainty about the upcoming selling season, or maybe the budgets as they percolate down to the RFP level weren't looking as strong as you might think? So, just maybe mention some places where you were positively surprised in the budget and maybe some areas where you were negatively surprised in the budget in terms of funding levels and how that translated into your full-year guidance on the top line.

I would say we weren't surprised by the budget. Let's keep in mind, this is still a very challenging marketplace in the government services space.

If you look at other companies that are forecasting their fiscal year, their next fiscal year, you're looking at 10%, 15%, in some cases 20% declines. We feel mid single digits would be a good performance. We think there's potentially some upside in there.

But just as in FY14, you can't predict this early in the fiscal year what negatives could happen. So, I think we're taking a very reasonable approach to this. And hopefully with a big increase in backlog at the end of our second quarter in September, we'll get a jump start in the second half and be able to beat these numbers. But for now, we think it's a reasonable place to start the year.

I do think it's important to note that we didn't see -- look, we're not tied to any big weapon systems and so forth. What we did not see in the budget was any reason to change our growth investment areas.

So when we sit back and look at the capabilities that we're currently investing in right now, we believe those continue to be supported by the budgetary environment going forward. So, no reason to change our investment profile at this point.

Okay, thanks. That's all I have.

Robert Spingarn of Credit Suisse.

Hi. Good morning.

Just going back to the question on the revenue per employee, and I wanted to ask you about staff augmentation. I think that's probably a smaller business for you from a mix perspective than for some of your peers. But are we perhaps seeing a somewhat permanent decline in the government's demand for the professional services/staff augmentation type work?

When you say a permanent decline, I hesitate to say anything is permanent at this point. Clearly, there have been -- look, it's hard to generalize across the entire federal government because obviously it's a huge market, but we've certainly seen pockets where they have cut back on staff augmentation.

But in terms of permanent, I think a lot of it depends upon the program, the clients and what their mission looks like.

Is it fair, Sam, to characterize your business as a little bit less exposed to that than maybe some of your peers?

I don't spend a lot of time looking at the competition when it comes to that sort of thing, frankly, because we're just driving against our agenda. So, I'm not sure I could give you a good answer on that. I would assume so, if you look at margins and so forth, but I just don't -- I couldn't.

Maybe there's another way to ask it. I know this is maybe a fuzzy thing to define but how big a business is that for you?

What we're hearing is that, just to say it a little bit more basically, where the government may have said send 10 guys over before for a particular project, now send 6, given the funding constraints.

I think there are clearly clients where that happens. There are others who are saying -- this is what I need done, send me how many people you need to get that done. It just varies.

Rob, I would add that, if you recall some of the discussions we've had over the last couple quarters about our Vision 2020 strategy, adding work in engineering services, software development, some of the higher margin, higher technical areas. Over time, that will have the staff augmentation part of our business be less of a percentage and, therefore, have less of a draw on our earnings.

So, I think that whole adding to those types of capabilities, we're starting to see that and we expect that to continue.

Kevin, that's exactly what I was getting at. Thank you both. That's very helpful.

Thank you. I would now like to turn the conference back over to Ralph Shrader for closing remarks.

Thank you, Shannon. And thank all of you. I certainly hope that we've been able to show that Booz Allen's capabilities and focus on our clients' core mission and our effective management of our business has enabled us to succeed despite a very challenging market.

Although our revenue was down 4.9% for the year, we delivered solid earnings in line with our guidance, we exceeded our margin goals, and we continue to generate strong cash flow. We returned significant value to our shareholders through regular and special dividends, and announced an increase in our regular quarterly dividend.

For fiscal 2015, we are forecasting continued margin improvement and solid earnings. And we have been encouraged by the pace and success of recent contract awards. As we described this morning, we continue to invest in market areas and in capabilities that we believe have growth potential, and will position us to thrive in Booz Allen's second century.

I'd like to close by thanking you all for being with us this morning. And also once again to recognize and thank Sam for his many contributions to this institution over his career with us. Again, have a good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And have a wonderful day.