Booz Allen Hamilton Holding Corp (BAH) 2015 Q2 法說會逐字稿

Welcome to the Booz Allen Hamilton's earnings call covering second-quarter results for FY15.

(Operator Instructions)

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

Thank you, Shannon. Thank you all for joining us for Booz Allen's second-quarter FY15 earnings announcement. We have also provided presentation slides on our website and are now on slide 1.

I'm Curt Riggle, Head of Investor Relations. With me to talk about our business and financial results this morning are: Ralph Shrader, our Chairman and Chief Executive Officer; Horacio Rozanski, our President and Chief Operating Officer; and Kevin Cook, Senior Vice President and Chief Financial Officer. We hope you've had an opportunity to read the press release for our second-quarter earnings that we issued earlier this morning.

As shown on the disclaimer on slide 2, please keep in mind that some of the items that we'll be discussing this morning will include statements that may be considered forward-looking; therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecast results. Those risks and uncertainties include, among other things: general economic conditions; the availability of government funding for our Company services; and other factors discussed in today's earnings release and set forth under the forward-looking statements' disclaimer included in our second-quarter FY15 earnings release and 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 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 second quarter FY15 slides.

Before we continue, I would like to say thank you to our analysts' community, a number of which have been with us since the IPO and welcome to those who have recently added us to their coverage universe. We now have 13 analysts, the most of any of our public comps. I think that is a good thing, right? So thank you and welcome.

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

Thank you Curt, I would like to add my welcome and thanks to all of you, our analysts and investors, for joining us here this morning. Last year at this time, we had just emerged from the government shut down, which brought great disruption and cost to our nation and led to major repercussions for our government clients and the contracting community at large.

While still not fully recovered, the environment today has improved and stabilized. I'm pleased to say that this morning, as we report Booz Allen's FY15 second-quarter results, corresponding with the end of the government's fiscal year, we are clearly seeing the benefits of an improved award climate.

For Booz Allen, this has resulted in a seasonally strong book-to-bill ratio and an increase in funded and unfunded backlog. Our revenue for the second quarter declined modestly, as expected given the residual impact of last year's shutdown and ongoing challenges in the broader federal contracting market.

I'm very happy to report that Booz Allen's earnings are well on track with our annual forecast. We're, again, on track to deliver margin improvement for the full fiscal year.

Quarter after quarter, since our IPO in 2010, we have told you what we expect to do to increase margins and deliver against our earnings forecast. I'm proud to report that we have continued to do just that.

Here are the financial headlines. Second-quarter revenue was $1.3 billion, compared with $1.38 billion in the prior year period, a 5.3% decline. Adjusted diluted earnings per share was $0.44 for the second quarter, compared with $0.47 per share in the prior-year quarter.

We saw positive trends in adjusted EBITDA margin, free cash flow, days sales outstanding, funded and unfunded backlog and book-to-bill ratio. We are reaffirming our revenue guidance and increasing the midpoint of our earnings per share range by $0.03 for FY15.

We declared a regular dividend of $0.11 per share payable on November 28, 2014 to stockholders of record as of November 10, 2014. This reflects our ongoing confidence in the business and our commitment to return value to our shareholders. Kevin will provide more details on our financial results and the underlying drivers of those results later on this morning's call.

In addition to delivering solid financial results for the current quarter, Booz Allen is focused squarely on the future. We have maintained our delivery and selling capability, enabling us to bid and win important procurements, especially those requiring a solution as part of the proposal. We continue to invest significantly in innovative capabilities in areas such as predictive intelligence, engineering, systems development and advanced analytics, which we believe put Booz Allen in a strong position to serve our government clients in their essential missions.

Additionally, investments in our commercial and international business are delivering strong results and showing impressive growth rates. As a result of our investment in these growth platforms, we believe Booz Allen is positioned to return to top line growth sooner than others in our market.

Last year at this time, as we were counting down to Booz Allen's 100th Anniversary in 2014, I announced our Centennial Community Challenge, an ambitious goal to contribute 100,000 hours of volunteer service during our Anniversary year. I am incredibly proud to tell you that we reached this milestone three weeks ago. By December 31, when our 100th Anniversary year ends, Booz Allen's employees will have significantly exceeded 100,000 hours of community service.

The impact of our employees' time and talent can be seen in children who read better, future scientists hooked on learning and innovation, animals with loving homes, solace to those who are suffering and healing and hope to the sick. The generosity, compassion and hard work of Booz Allen's people have truly made a difference.

In other notable community outreach, the Booz Allen sponsored Degas/Cassatt Exhibition had nearly 400,000 visitors, making it among the most successful exhibitions at the National Gallery of Art in the past decade. Booz Allen will be the presenting sponsor of the upcoming Veteran's Day Commemoration at the USS Midway Museum in San Diego. We dedicated our Centennial year of 2014 to partnership and service. With two months still to go, I hope you share my pride in all that we have achieved.

This is my last earnings call, as the CEO. I want to take this opportunity to thank Booz Allen's incomparable people, our clients, our nonprofit partners in the community and you, our investors, for your unwavering support. It has been a privilege to be part of this Firm for 40 years and to lead it for the past 15.

Going forward in my continuing role as Chairman of the Board, I will focus on shareholder value and risk management. I will personally remain connected with this great institution. I will support the Firm's next generation of leaders, in whom I have the greatest confidence.

Now over to you, Horacio.

Thank you, Ralph. Good morning, everyone. At Booz Allen, our partners live by a simple credo, that we hold the Firm in trust for future generations.

Ralph, I cannot think of anybody who represents those words better than you. You have led Booz Allen through periods of growth and change, positioning us today as a market leader with a superb reputation, strong financials, a clearer vision and an exceptional team that is prepared to drive growth and innovation in the future. Ralph, all of us congratulate and honor you for your leadership as our CEO. We know we will be well-served by your continued guidance as Chairman of the Board.

Let us now turn to the business at hand and to slide 4. During our last earnings call, I gave you a high-level overview of Vision 2020 and noted that we would use upcoming earnings calls to provide additional color on our growth platforms.

To summarize, Vision 2020 is a comprehensive strategy to position Booz Allen to grow in our second century. It can be best described in three building blocks.

First, expanding our capacity to serve as our client's essential partner, through a combination of deep domain understanding, market leading consulting talent and broader technical capabilities. Second, investing in differentiated growth platforms, including engineering, software develop, our innovation agenda and our new commercial and international markets. Third, building a distinctive business and people model, to mobilize the best of our people in our culture across a broader range of markets, services and solutions.

So today, I would like to update you on the progress in our North American commercial business. To remind you of the context, we re-entered the commercial market in 2011, after the expiration of a non-compete resulting from the spinoff of Booze & Company three years earlier.

Returning to commercial in 2011, we specifically focused our service offerings on areas where we could leverage the most relevant intellectual capital from our government business. Our three most compelling service offerings fall in the broad categories of military-grade cyber security, next generation analytics, i.e. big data and regulatory compliance.

We focused on clients in three primary verticals of financial services, healthcare and energy, but our unique expertise, particularly in cyber, has begun to draw clients from manufacturing and retail as well. Under Lloyd Howell's and Reggie Van Lee's leadership, our North American commercial business is growing well into the double-digits, with a margin structure that promises to be 2 to 3 times that of our core government business over time.

We now have a portfolio of blue chip clients. We've also built an outstanding commercial team that works hand-in-hand with the strategic innovation group and our brother Booz Allen staff to do amazing work for those clients.

So to give you a little more color, let me describe some of the excellent work we are doing in commercial. The first area is cyber security. Every week, it seems there is a greater pressure and concern about cyber security in the Board room of US corporations.

Our approach with clients is holistic and can lead to sustainable protection. As we speak, we are helping major clients to identify lurking attackers before they hit, using our unique predictive intelligence services. We combine that predictive shield with a broad range of big data and network analysis approaches to ensure that the adversaries are completely out of our client's networks if they have been penetrated.

We help clients build their own fusion centers, similar to the ones pioneered in the federal government, so they can expand their cyber defenses over time. In ours and our client's views, nobody else has the technical, consulting and trade craft expertise that Booz Allen brings to bear.

Now shifting gears to an example of next generation analytics. We are working with a pharmaceutical company by using big data techniques to help them increase the production yield and availability of a critical medicine.

The secrets to a better yield were hidden in elements of the manufacturing process that generate massive amounts of data. There was information from shop floor systems, maintenance systems and building management systems, among others, but analyzing these stores of information through conventional means was way too costly and time-consuming.

So Booz Allen data scientists worked with the client to perform cloud analytics, employing an architecture approach we call the data lake. This concept, pioneered by our Firm, allows us to use the massive processing power of the cloud itself to analyze vast amounts of data from diverse sources at incredible speeds.

In the end, we helped the client come up with conclusive findings of our production yield variances in just three months. Since then, the team has been begun to apply the new data analysis approach to additional life saving medicines to improve efficiency and ensure a plentiful supply.

This commercial work leverages the best of Booz Allen by combining intellectual capital from across our business with a deep reservoir of expertise and consulting skill. While it is a work in progress, we are very optimistic about our prospects for continued growth in the commercial market.

Finally today, I would like to cover some recent and breaking news. Last week, we announced the purchase of the healthcare assets of Genova Technologies, which includes a staff of about 40 people who provide IT solutions and strategy for the Centers for Medicare and Medicaid Services.

Our partners, Susan Penfield and Kristine Martin Anderson led this effort. They will integrate this new team into our ongoing support for CMS, to position us for growth of our technology footprint in the future.

On the breaking news front, I am very pleased to announce today that we have acquired Epidemico, Inc, a small but very exciting Boston-based start-up. Epidemico's an infomatics Company. They provide early insights, continuous monitoring and consumer engagement across many important aspects of population health, including disease outbreaks, drug safety and supply chain vulnerabilities. This is the capability that enabled its staff members to detect and track the outbreak of Ebola earlier this spring.

The Epidemico acquisition was led by partners, Fred Blackburn and [Jake Jacobson]. It will reside in the SIG under Karen Dahut's leadership. Karen and I are confident that Epidemico will play an important role in our broad nextgen analytics strategy, by bringing leading edge expertise in epidemiology and social media analytics, as well as relationships with world class institutions, like Boston Children's Hospital.

Ultimately, we want to deploy a full portfolio of analytic platforms on solutions to address the critical needs of our entire client base. Later this morning, we'll release details of this acquisition and more information about its alignment with our innovation agenda.

All the various topics we've discussed today are an example of the transformative efforts going on across our Firm. I could not be more excited about the progress we are making and what it means for our future. I hope you are too.

At this point, I would like to turn the call over to our Chief Financial Officer, Kevin Cook, who will provide you with his insights on our financial results.

Thank you, Horacio. As Ralph noted earlier, we've completed the first half of FY15 in a strong position, with margins up over the prior-year's first half, award activity leading to growth in funded and unfunded backlog and a book-to-bill ratio in line with our expectations. Additionally, we saw head counts stabilize over the June quarter. While revenues are down, you'll see that this is a second consecutive quarter in which the rate of revenue declines has slowed year-over-year.

All these positive outcomes give us confirmation that our strategy is on track. I give credit to Booz Allen's staff and leadership for their collective execution in what continues to be a challenging market.

Operationally, we saw continuing strength in the second quarter. Staff productivity remains high. We are maintaining effective management of our cost structure. Profitability on contracts and task orders remain strong.

Further, while we saw a decline in staffing from the year-ago period, the staffing level remained relatively flat from the first quarter of FY15. Our strong award performance at the end of the government's fiscal year has now given us the opportunity to begin to increase the pace of hiring.

Now, I would like to go through the specifics of our performance in the second quarter and then discuss our FY15 guidance. To begin, let's turn to slide 5.

The 5.3% revenue decline was the result of reduced demand in the current government spending environment, as well as the residual impact of the slower award pace in the months immediately following last October's government shutdown. Additionally, we saw a decline in billable expenses, which as we've noted in the past, are lower margin revenue sources.

Operating income declined by 10.1%. Adjusted operating income declined by 10.7% over the prior-year period. These declines are attributable to revenue declines and were mitigated somewhat by volume-based reductions in compensation costs and related fringe benefits and to a lesser extent, a decrease in depreciation and amortization expense.

Adjusted EBITDA margin of 10.6% in the quarter benefited from effective management of staff productivity and the qualification for a certain state tax credit, a portion of which benefits our indirect rates; therefore, benefits EBITDA. Year-to-date, the adjusted EBITDA margin of 11.2% is in line with our forecast and as occurred last year is expected to decline in the second half as a result of higher indirect spending and higher costs for fringe benefits including holidays and paid time off.

The factor that drove these decreases in net income and adjusted net income compared to the prior-year period were largely the result of the factors affecting operating income and adjusted operating income, but partially offset by the benefit of a lower effective tax rate as a result of the Company's qualification during the second quarter for the state tax credit I mentioned a moment ago. I'll note here that this tax credit is responsible for our reduced effective tax rate in the quarter and in the full-year guidance.

In the second quarter, diluted earnings per share decreased to $0.42 per share from $0.45 per share in the prior-year period. Adjusted diluted earnings per share declined to $0.44 per share compared to $0.47 per share in the prior-year period. The per share earnings were driven by the same factors as net income and adjusted net income, with the decreases seen in these metrics also impacted by an increase in the diluted share count.

Our funded backlog increased 3.6% over a strong prior-year period to $3.4 billion. Unfunded backlog increased by 3.1% to $2.8 billion. Our book-to-bill ratio for the second quarter was 1.93, a significant increase over the 1.58 ratio from a year ago.

With the second quarter award activity we are reporting today, I think it's important to note the improvement in the ramp we have seen in the first half of FY15, over the first half of 2014. Book-to-bill for the first half of FY15 was 1.4 times, compared to the 1.04 times that we saw in the first half of FY14.

The last thing I would like to discuss relative to backlog is the decline in priced options. This decline has been driven by a continuing trend toward awards for shorter periods of performance, as well as the timing of contract extensions and transitions between current and follow-on contracts.

I would also like to remind you that we only include items in our backlog for which we have received signed, contractual obligations, definitive contracts, task orders or modifications. We do not include forecasted, factored or potential revenue in our backlog.

Next, let's move to cash. Cash flow generation continues to be a source of significant strength for Booz Allen. Free cash flow in the first half increased 44% over the prior-year period to $191.6 million.

Cash generation in the quarter benefited from stronger collections and a decrease in cash taxes paid as compared to the second quarter of FY14. Cash also saw the benefit of reduced principle payments on our Term Loan B debt, which we described last quarter. We announced today another regular quarterly cash dividend of $0.11 per share, which remains the top priority for our use of cash.

As we have said many times before, acquisitions remain our next priority. With today's Epidemico announcement and the recent announcement of the acquisition of the assets associated with the healthcare unit of Genova Tech, you can see that we are actively pursuing opportunities to build capability in strategically important areas.

The next priority for capital deployment is to return cash to shareholders through special dividends. With the increased liquidity in our stock, the Board may also consider share repurchases as well.

With that backdrop, let's turn to slide 6. I will discuss our guidance. For the full year of FY15, we are reaffirming our top line revenue guidance, which calls for a mid single-digit percentage decline. Based on performance in the first half and our forecast for the second half, we are increasing our full-year earnings per share guidance and narrowing the range.

At the bottom line for FY15, we are increasing our guidance for diluted earnings per share to be in the range of $1.48 to $1.56 per share and adjusted diluted earnings per share to be in the range of $1.54 to $1.62 per share. For adjusted diluted earnings per share, this is a $0.03 increase to the midpoint of our range.

Now, I'd like to turn the call back to Curt, so we can move to the Q&A portion of the call.

Thank you Kevin, Horacio and Ralph. Shannon, at this point, can you please provide instructions for the question-and-answer session of the call.

(Operator instructions)

Bill Loomis, Stifel.

Good quarter. Just looking at the awards, can you talk a little more? You said the durations is shortening on the awards. Can you give us -- maybe, be a little more specific on that?

What you are seeing with the -- in the quarter specifically, with the 1.9 book-to-bill, on what clients are doing? Also talk about margins. How much was new versus re-competes?

Then my follow-up is, just tell us the extent that you are hiring ahead now. I know in the past, prior to last year, you would hire pretty aggressively in the summer. What are your plans? What is going on now in hiring ahead? Thanks.

Bill, I think you figured out a way to put four questions in there actually. (laughter) Well, let's start with the priced options, that I think you asked about first.

I think you may be aware, but maybe not everybody on the phone is, the government -- the federal government has started to focus on recompeting contracts every three years, whereas before a lot of our major contracts were five years in length. There are some still large contracts out there that are buying vehicles, such as OASIS and things like that are 10 years. But the average period of performance on the contracts that have been awarded, I would say over the past year or so, has declined roughly about a month, I would say.

What's having -- maybe even a larger impact, Bill, is that when the government chooses to extend contracts instead of award new contracts and where we are the prime, what is happening is, when they extend it six months or a year, that funding goes directly into funded and unfunded. As opposed to when they award the recompete, we would see lower amounts going into funded unfunded and more going into priced options. So it skews the components of our backlog a little bit based on what's going on in the marketplace.

When we look at the second quarter and the 1.93 book-to-bill, we had a very broad-based increase across all of our markets. Civil and defense and intelligence all showed very nice increases. It wasn't focused in any one account within any one market. It truly was broad-based.

From a margin perspective, we continue to see strong margins. I would point out, we had this discussion at this time last year when we had a very strong first half and we talked about increasing our rate of investment in the second half. We will also see that same thing occur this year.

So I caution everybody not to take the first half and multiply by two, I think that's the same guidance we provided last year. From a hiring perspective, we are beginning to ramp up the hiring, as we have said. That is something that's been a bit different from year's -- the past couple of years, anyway, in that with the backlog that has come in, we feel confident that adding the heads will allow us to drive additional top line growth. I think I covered all your questions, Bill.

Yes, thank you.

Carter Copeland, Barclays.

Congratulations, Ralph, on last call and all of your successes. Best of luck in not coming to work as often.

(laughter) Thanks, Carter, appreciate that.

Couple of questions, the first one, Horacio, I wondered if you might expand a little bit on the commentary around the commercial and then healthcare and the recent transactions? As you look ahead in that marketplace, how fragmented is that space from how you guys would like to approach the market?

I mean how many sorts of transactions are out there? Do they fit together in any way thematically? Or should we think that this is -- each one of these transactions is a kind of one-off or niche provider that you can use to leverage your existing business or to your existing client base in some way? Any color you can give us on that?

Yes, sure. Appreciate the question, first of all. I think that if you look at what we've said, is we have a set of focused growth platforms. They include things like software development, engineering, advanced analytics, the innovation agenda, commercial international. We are investing heavily organically on those.

When the opportunity presents itself to do something novel and interesting that is inorganic, we'll take it. So I think you can fit the last two transactions and the two transactions from the couple of years ago, they hang perfectly from that framework.

The other thing that I think is meaningful, at least for me, in this is both of these transactions happened in a way where we were providing for the sellers. It wasn't just about the money. It really was about -- they had a passion for what they did. They built something important.

They felt that it was important for them to connect it up with Booz Allen and with our growth prospects. So the cultural fit, coming in, is also very strong, which is something we look at. Then finally, as a result of that, we weren't necessarily the highest bidder in these transactions, they were done, I think at you know, very fair pricing but they were done in a way that, it benefited everybody.

So, to the extent that things like that are out there, we continue to look. Whether they come in sort of smaller pieces or larger pieces will depend on the platform. In this whole area of social media analytics and bio surveillance and so forth, there are large players in the hundreds of millions of dollars that we would be interested in, so you are looking at start ups. Epidemico's, an amazing story in terms of what they bring and what they have achieved.

So, working at that site made sense. In other areas, the opportunities will probably come in bigger chunks. We'll -- one of the things I have learned is you have to in some ways take what the market gives you. We have been working through that very deliberately to make sure these things are on strategy.

Great. As a follow-up, I'm not sure exactly what you want to say, but obviously last night, a big transaction in the space announced. Given your commentary about the bifurcation in the market, in the past from -- to a sort of low cost and high-value providers, in this marketplace. I think last night's transaction saw a combination of two Companies -- or proposed combination of two Companies that kind of would go in between there.

I think the commentary was suggestive of some sort of new level of cost effectiveness, I think is the theme. I think some of your traditional customer sets.

When you look at potential business combinations like that, like the one that was announced, do you think that could introduce any sort of pricing pressure that's incremental from where we are today? Or do you think you are sufficiently insulated in your offering and your capabilities, but that's not something you worry about?

First of all, we really would want to use as much of the call as possible to talk about our performance and how we've done. We are pretty proud of what we have accomplished, including this past quarter.

We'll refrain from commenting on specific competitor moves and things like that. At the higher thematic level, this notion that the market is bifurcating, I would probably argue to you that this transaction fits into that narrative and into that logic quite well.

That we are, generally speaking, not going head to head with these kinds of companies and the kinds of things they are going to do together. So, beyond that, I think we are very comfortable with both our strategy and our performance, and our progress against our strategy.

We expect to see us as winners and losers emerge in this very difficult market. That there will be more interesting transactions to ponder over.

Okay, Great. Thanks. Good quarter.

Robert Spingarn, Credit Suisse.

Again, best wishes to you, Ralph.

Thank you.

Kevin, question for you on the margins, if I could? Then I have a question on bookings and sales.

But on the margins, you talked a little bit about the decline in EBITDA year-on-year. But still we have adjusted EBITDA dropping about double the rate of sales.

I understand that costs will go up later in the year, so a little curious as to why we see this now? Is this reflective to some extent of pricing?

Acknowledging the fact these margins are still pretty good. Are we seeing some pricing effect here?

No, Rob, we are not seeing the pricing effect. If you look at the first half, for example, we are up at our adjusted EBITDA margin over last year by about 11 basis points.

We have costs that go back and forth between quarters during the year. We are right on track from where we'd hoped to be.

But relative, perhaps to the first quarter, the numbers just seem to move around a bit and not all of it seems to be cost. So, I'm just wondering if the revenue change isn't simply billable hours and pass-throughs, but also -- that's why I asked the pricing question. Then I have another question on the cost.

No, the billable expenses are down at a higher percent than what we call -- if you remember back in the day, we call it value added revenue, which is Booz Allen internally generated labor. That actually has a lower margin tied to it.

But we had additional bid and proposal expense in the second quarter that we normally see at this time of year, as opposed to our first quarter, which ends the end of June. So there is a lot of dynamics that go through -- that flow through our costs.

But it has really, very little to do with pricing pressure at all. Our margins are holding exactly where we thought they'd be.

Okay. Then just from a cadence perspective, you reminded us not just to double the first half performance for the second half because of the higher investment. Will that show up in G&A as it did last year as primarily a fiscal fourth quarter item?

Some of it will be in G&A and some of it will run through our cost of sales. It really depends on how we invest.

Okay. Then, just as a final question, on the bookings, very strong in the first half. This is, I guess perhaps, for Horacio.

The book-to-bill clearly very strong. It sounds like duration is changing a little bit. But does this mark the bottom in the government service business?

Might we expect next year to be an up year? Or would you, instead, expect to see bookings offset a little bit here in the fiscal second half? How do we think about that from a forward perspective?

I guess I could tell to you wait and ask me this question until after the election next week, but I would probably refuse to answer it then too. (laughter) I think the honest answer is, we have been investing to grow in this market, regardless of what the market gives us.

We are looking for ways to lean forward and try to do that. There is still a lot of turbulence ahead. There is things in the political process that I wish I could predict, but I don't think any of us can.

So, I think we are -- the specific timing of things is sort of an interesting thing. The question about the market, overall, is also sort of an interesting, philosophical question.

The way we are picking it up is much more about what are we doing to try and drive growth? What are we doing to invest in our future?

Against those metrics, I think that sort of the numbers that you are seeing are a reflection. More of that, than necessarily of the overall market.

I would characterize it as significantly different than last year, these first two quarter in terms of orders.

I think that is true. I think that -- it's driven by a lot of factors, some of which is the clients having visibility into their budgets, more than sort of three months at a chunk or three weeks at a chunk, allows them to start to really focus on mission. When they focus on mission, we have the ability to work with them. That naturally leads to sales.

So that is sort of the underlying cycle that we believe, over time, will return to this market almost, regardless of the political process. But the political process can throw monkey wrenches along the way.

Fair enough, fair enough. Thank you.

Cai von Rumohr, Cowen and Company.

Good job. So maybe tell us a little bit about the tone of bookings? What you are seeing now?

I think you were the only one to kind of say you are seeing business pick up. Most of your peers are saying, yes, a little bit, it is more mixed. What are you seeing today?

Obviously, last year, you had an abnormal bookings quarter. I think you were more normally in the 0.6 book-to-bill in this quarter. But give us some color on what you are seeing today.

Hey Cai, it a Kevin. We actually are, historically, way over 1.0 in the September quarter, I think. Last quarter, -- or last year this time was 1.58. It was 2.15 the year before that.

We actually -- I think the good news for us, I don't know about others, but speaking for us, we actually saw some bookings occur in our first quarter that ended the end of June. That quarter was actually higher, much higher than it was last year. So when you look at the first half, we are definitely seeing an increase in award activity.

I think some of this is, people -- our clients have delayed awarding contracts, waiting for some budget clarity. Then when they got it last spring, they moved out on make something awards that had been held up.

There are still quite a number of awards out there. In fact, we are anticipating continued heavy proposal activity over the next six months, as a lot of these major procurements get teed up, finally.

Now, by the time they get awarded, we're probably talking our FY16 or FY17 impact. But I think it is a good sign that the clients are dropping these proposals.

Okay. Thank you. Secondly as a follow-up, maybe give us a little bit more color on the financials of these two acquisitions. What do they bring in sales? Essentially, what did you pay? What was the price to EBITDA?

Then, you mentioned that you think that you guys will be one of the first in your sector to see revenues go into positive territory. Any chance that could happen in the fourth quarter?

Well let's start with the acquisitions first. Cai, from a GAAP perspective and almost any measurement perspective, financially speaking, these are very immaterial acquisitions. In fact, as you -- since you brought it up, I'll tell you, I really don't have any intention of trying to split out organic and inorganic revenue over the next year for these two. They are very minor.

The key to these acquisitions is not their sales, it's the impact on our -- on Booz Allen Hamilton's organic revenue and taking the capabilities that these two firms offer and marrying them up with what we already have, which is going to drive synergies and higher organic growth in these two cases, specifically in commercial and government health markets, as well as others, potentially. So we are really at a point where if we have a larger acquisition, we'll be happy to provide the details you have asked for.

But these are immaterial from a GAAP perspective and almost any other perspective. So we are not going to do that.

In this current fiscal year, I will tell you, there won't be any accretion because of the transaction expenses. We do expect there to be modest accretion in our FY16 but that's about as far as I'll go.

Then to the second one as to, is there any chance that your revenues could be in positive territory by the fourth quarter?

I think that we are going to stick with our annual guidance of mid single-digit decline. We don't get into the quarters, so I think I'll just leave it at that.

Thank you very much.

Thank you.

Edward Caso, Wells Fargo Securities.

Let me add congratulations here on continuing to be one of the best performers in the hostile environment. I'm curious if the continuing resolution and the potential, it may get extended out into the March period, how that may impact your view on the market. If for some miraculous reason it goes away in December, could that improve the outlook?

Hi, Ed, it's Kevin. Actually our outlook is just fine. We are pretty bullish on our opportunities going forward. But I think, in general, the CR this year is not the factor it's been in years past.

Because this year's sequestration budget level -- the level coming out of the budget control act is not substantially different from flat, from being flat, for the last government fiscal year that just ended. So, I really don't think this is providing that much of a challenge for, say DoD, right now.

I was lucky enough recently to have -- to attend a luncheon with the DoD's CFO and he has much said the same thing, that this really, this initial CR, going into December probably doesn't change a lot for them. I think if it goes all year it might become more of an impact, but I would expect to see this get resolved if not December then maybe early in first calendar quarter. Because right now, we are not anticipating that being a headwind for us.

All right. My question is a math question. You changed the guidance by $0.03. My sense that state tax benefit is $0.02. Your average share count guidance went down, even though your stock has been performing strongly, so I'm curious why it went down and that sounds like a math of about another $0.01. So do I have it right? The $0.03 is the tax and the share count?

No, on an annual basis, the tax impact is less than a $0.01. The share count is just the normal evaluation we do quarter-over-quarter about option grants, option exercises, restricted stock grants, it's nothing more than that. I think it's down about maybe, what? 1 million shares?

Yes.

I'm looking at Curt. It's something like that. So the majority of this, really had nothing to do with those two factors.

Great. Thank you.

Joe Nadol, JPMorgan.

I would like to ask my first question just back on the strategy and the M&A component of the strategy, specifically. Horacio, I think you said much earlier in the year maybe even late last year that you were looking at getting more involved in M&A. We see -- we haven't seen anything for most of the year and now a couple of very interesting but, as pointed out, very small deals from a financial standpoint.

Is this what you were referring to a year ago or nine months ago when you said that you were looking at getting more active in M&A? Or is there more to this and this is sort of the very beginning of a broader strategy?

We, as I said last year and I think I'll reiterate it, we were looking at both organic and inorganic investment, to double down on our strategy. That includes a set of growth platforms, we are focused on them. If we find acquisition targets that fit them, that make sense culturally, that are at a good price, we are ready to act. We have now built the internal capability to do so.

The speed at which they happen and the size of all of that is really more dictated by what we find and how excited we get about what is there. We are in a good position, both financially and marketwise and strategically. So we are not going to make acquisitions just to make acquisitions.

So if we find the things that fit, like these two, we will -- we think we are demonstrating, we stand ready to act. If we don't, we don't. It is, maybe no more or no less than that.

Okay. Then, on the second question, I know, I'm not asking you to provide quarterly guidance, I know you are not going to do that. But last year, of course, we had the shutdown, which impacted your Company.

As we think about the profile here into the back half of the year -- not just on revenue but more importantly the way you manage your spend and your expenses. Is there any comment you want to make on that? Or should we just look to prior years to get a sense?

Joe, I think the second half of this year will be similar to last year, in that we will be ramping up our internal investments. So for example, on the last earnings call, Ralph Shrader talked about our expansion in the Middle East. A lot of those, the cost of that expansion is going to flow into the second half of our fiscal year.

Likewise, while we have tried to smooth out because we didn't anticipate a shutdown this year, we've invested a little bit earlier than we did last year in some of these growth areas. But still, you can't calendarize it and say we are going to spend one twelfth of the anticipated budget each month. So that is some what back-loaded albeit not maybe as much as last year.

So we still anticipate spending the cost that we budgeted on these, I should say on the investments, internal investments. So, I think it would be a similar pattern to last year.

Curt, in their first-quarter call also. Or maybe it was in last year's final call, talked about lower highs and higher lows. So, I would expect, you see we are $0.03 down in the first half. Maybe we'll be a little bit above the second half at the bottom line than we did last year. But that is the kind of trend we are looking at.

Okay, that's helpful. Thank you.

Steven Cahall, Royal Bank of Canada.

Maybe just first on the comment about potentially returning to organic growth sooner than the others, I was wondering if you could just maybe give us a little bit of a view on how you are seeing your major end markets trending? If we think about that comment over a sort of medium-term time horizon, is either civil or intel or defense doing something significantly different than what it's been doing for the last couple of years?

For instance, is civil starting to pick up pace? Is the rate of defense slowing, not slowing, et cetera, in terms of the growth decelerations? A little bit of color around that would be very helpful.

I guess what I would say about that is, the number one issue that we have been dealing with is not the overall size of the market or direction of the market, but the uncertainty that our clients face in terms of their own budgets. That has been particularly true in DoD, but it's really been true everywhere.

That uncertainty was dampened significantly when they reached a two-year agreement and they had a little more visibility. Again, they could get back to performing against their missions and advancing their missions.

I think that is true across largely all of the federal government. If you can make generalizations, which are always dangerous.

Inside of that, it's -- you would expect there is some parts of the government that are going to continue to expand the services that are required. We all read about the VA and the challenges the VA has. The funding that the VA is going to receive to take care of the population that is coming back from the conflicts and make sure their needs are met.

Other parts are going to shrink to accommodate that. We are, I guess, the greatest asset we have as that shifts is ultimately our cultural and our business model and the uniqueness of that. The fact that we shipped resources to where the opportunities are and that we do that well. We have been doing it forever.

We have a leadership team that collaborates and is focused on that. We have an entire partnership, really an entire culture, 22,000 people who are going to go answer the call of where the opportunity is and the needs are without having to worry about internal questions about P&Ls and incentives or any of that nonsense.

So, that's been the hallmark of Booz Allen. That's been the power of Booz Allen. Really, over the last 20 years. It is what I think is going to propel us in the future as well, is that if we, if one of our clients needs us, and has enough visibility to the funding to actually be able to buy from us.

We'll bring the best of Booz Allen to bear to that. We will shift with the market as the market shifts.

Okay. Then, Kevin, you mentioned share repurchases. Again, it is not something we have seen a lot of in terms of impacting the share count. So, how do we think about both the Management team and the Board in terms of possibly taking that on?

Do we think about share count possibly stabilizing in the future? We are offsetting creep? Or do we think about it possibly going down at some point?

Well Steve, I think the reality is now that Carlyle has put something like 30 million shares in the market in the past year. We have more liquidity than we certainly had at the IPO date four years ago.

When we talk about it, it's really that the Board has that option open to them now. Clearly, it was an option before. We have a $30 million authorization to repurchase shares. We had never done that, but I think it's more viable now.

It will be more part of our quarterly Board discussion to say that we are going in that direction, versus special dividends, I don't think would be accurate. But it's, I think it's got a greater possibility now maybe than it did a year or two ago.

From a share count, long-term share count view, I mean, I think, over time, we would like to try to keep share count somewhat flat. But that's really up to the Board.

We have been able to make our guidance anticipating share count increases. So it's not something that we have to do but that may be something we choose to do. Or the future will tell I guess.

Great. Thank you.

Jason Gursky, Citi.

It's actually Jon Raviv on for Jason. Thanks for taking the questions. On the growth opportunity going forward, it seems like a lot of that might be coming from new businesses. We have heard that over time especially commercial international should be higher margin.

I was wondering about near-term? In light of that, can you revisit your 10 basis points annual margin growth guidance. In a lot of the investments, you have to make and also in light of the fact that you're outperforming that so far year-to-date?

Yes. This is Kevin. I don't think we need to do any acquisitions to have our margins increase. I mean, we have demonstrated since the IPO, I mean, Curt probably has chatted with Jason that we probably had the worst margins in the industry at that time, now we have the best.

With the growth platforms that Horacio and Ralph have talked about in the past, those come with higher margins, normally, even in the government space. Then when you throw in the rapid acceleration in the commercial and international businesses and our ability to control our costs, we are still very, very comfortable with that 10 basis point goal on an annual basis.

You are right, we are well-over achieving that, again, through the first half, but as I said earlier, we will see decreases in the second half, as we invest heavier, if you will. But still, we should, absolutely, meet that goal in FY15.

Okay. Then a quick follow-up for Horacio. You talked about uncertainty having been the biggest impact in the market. How should we think about it?

Over the next year we seem pretty clear but then sequestration is supposed to return in late 2015 I suppose. How do you see that playing out given the conversations you have had so far?

I think there is a lot of questions about that. There is a lot of -- there is as many scenarios as there are people that talk about them.

So I think the reality is we have to focus on what we can control, which is our performance, our investment, our focus as a business. Staying close to our clients and working closely with them and I think that's what we are doing. That is what we are up to.

I think the political process will be what it is. The impact of that will ultimately influence the market for sure.

But from our perspective, we are -- we have focused on flexibility and agility for the last four or five years. We, as a result, have been able to really out perform the market, not just when it was going up but also when it was going down and we are committed to continuing to do the same and all the flexibility and agility didn't stop last year. We continued to focus on it, continued to drive it and at the end of the day, that's the game we are going to play against whatever either challenges or opportunities the fiscal process creates.

Great. Thank you.

Ronald Epstein, Bank of America Merrill Lynch.

Just a couple of quick questions, maybe big picture questions. When we think about the expansion into more commercial and international businesses, when do you expect that business to pick up? I guess how are you doing in that market?

What bottlenecks, excuse me, have you seen? Then maybe a follow on to that maybe part of the same question actually is also in commercial cyber, how big of an opportunity is that for you guys?

Well, I guess the way I would describe it is we are excited about both what we have accomplished and the progress that we have made and the opportunities that are there, because our service offerings, the ones that we are choosing transport into the commercial market, are viewed by our clients as differentiated. That's been really our goal.

We, you don't, our view, my view, you don't go into a market that is mature and try and succeed through me-too service offerings. You go in and bring something new and something different. We've done that in the area, which I guess the term of art is military-grade cyber.

The work that we are doing there is measured by clients unique and distinctive and is creating growth in both the US and in MENA. Our work on analytics is beginning to prove to be both unique and very special and very powerful. We see opportunities there and we will continue to both invest in that and drive that and see where the market takes us and continue to both meet demands and meet and perhaps exceed their own expectations for how fast we can grow there.

Okay, great. Thank you.

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

Thank you. I hope we have conveyed our pride in Booz Allen's business and financial performance in the FY15 second quarter and the first half which just ended. Also, our optimism in the future.

We are particularly proud of our bottom line performance, as reflected in our ability to raise our forecast. We are also proud of our increase in funded and unfunded backlog, our strong book-to-bill ratio and our strong cash position.

As we mentioned earlier, this, indeed, is my last earnings call as a CEO; therefore, my last opportunity to sign off. I wanted to thank you, our investors, for your support. I hope you share my pride in what we have been able to accomplish in the four years since our IPO, in spite of a very challenging market.

Booz Allen has consistently delivered our earnings guidance and improved our margins and delivered excellent shareholder returns. I'm very excited and confident about the future.

I can assure you that the Firm is in very good hands with our next generation of leaders. I want to thank you all for joining us on this journey together. Thank you for being with us today.

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