Booz Allen Hamilton Holding Corp (BAH) 2016 Q1 法說會逐字稿

Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's earnings conference call covering first-quarter results for FY16.

(Operator Instructions)

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

Good morning, thank you all for joining us today for the Booz Allen first-quarter FY16 earnings announcement. We hope you've had an opportunity to read the press release for our first-quarter earnings that we issued earlier this morning. We've also provided presentation slides on our website, and we're now on slide 1.

I'm Curt Riggle, Vice President, Investor Relations and with me to talk about Booz Allen, our business and our financial results are Horacio Rozanski, our President and Chief Executive Officer, and Kevin Cook, Executive Vice President and Chief Financial Officer.

As shown on the disclaimer on slide 2, please keep in mind that some of the items that we'll 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 services, and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our first-quarter FY16 earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call.

During today's call, we will also discuss some non-GAAP financial measures, and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our first-quarter FY16 slides.

It's now my pleasure to turn the call over to Horacio Rozanski, our CEO, and he'll start on slide 3.

Thank you, Curt. And good morning, everyone. Today Kevin and I will take you through our first-quarter FY16 results and how our performance aligns with our long-term growth strategy, as well as our plan for the fiscal year. I'll also talk to you about our innovation agenda, an exciting part to the Vision 2020 growth strategy.

Those of you who are most familiar with us, know that Booz Allen's success over time has been grounded in two things, long-term focus and strong day-to-day execution. We establish a path that guides our decision-making, we define specific goals for the near term, and then we relentlessly and successfully execute against those goals. So that's what we continue to do.

We're managing our business today to drive sustainable quality growth and create value for our clients, our people, and our shareholders. We entered FY16 with a plan to front load some costs so that we can capture increasing opportunities in today's healthier market. Our first-quarter results reflect execution of that plan.

One quarter into this fiscal year, our pipeline is healthy and the stabilized market is signaling demand. Bid and proposal activity have picked up, and we've built a bench so that we can capitalize on the opportunities that the market is presenting. As always, our day-to-day focus is on being an essential partner to clients, delivering solutions that are right at the center of their most critical missions.

At the same time, under our growth strategy we're investing for the future in new businesses, capabilities, and talents so that we have lasting differentiated and profitable positions in key areas. Our growth platforms are maturing nicely.

I am very excited by the way our team is reorienting towards growth, sharpening our competitive edge, and expanding our clients' perception of what Booz Allen can do for them. My firsthand discussions with clients across all of our markets confirm that they appreciate the value our people already bring and view our growth platforms as additional sources of differentiation.

So in summary, we remain on track to deliver on the guidance we provided two months ago, even if there are some ups and downs as the year progresses. Equally important, with the investments we're making, we're positioning ourselves very well for next year and beyond.

Against that backdrop, I'm pleased to announce today the issuance of a regular, quarterly dividend of $0.13 per share payable on August 31 to shareholders of record on August 10.

I'll let Kevin provide the details on our first-quarter results, but before turning to him, I want to say a few words about the SURVIAC transition.

As you know, we've been working to transition a significant amount of the work from the SURVIAC contract to new ordering vehicles. Because the contract expired only three weeks ago, the transition is still playing out as we speak. What I can tell you at this point is that the efforts of the team have truly been outstanding. Our team, led by Joe Logue, our Defense and Intelligence Group Lead and by EVP Robin Portman, has done a great job in winning new contract vehicles, transitioning much of our existing work, and minimizing the impact on our people.

The majority of employees that have done work under SURVIAC have been placed on new or existing contracts. As we fully expected, some of this transition is still in process, and we still don't have the full picture, but the part of the transition that is behind us has gone very well.

With that, Kevin, over to you.

Thank you, Horatio. I'll begin on slide 4.

Before I take you through the details of the quarter, I want to underscore the point that we manage the business on an annual basis and that we opened the year just as we planned. The market has stabilized to a point that clients are focused on priorities and their missions, and as a result, we have a solid opportunity pipeline and have seen a healthy increase in proposal activity.

In our last two fiscal years, we adjusted our spending pattern to create financial flexibility during the first half, to position for potential uncertainty in the market in the second half. This year, as a result of our confidence in the market, we've made a change so that spending will be more even throughout the year. We have pulled forward spending on bid and proposal activities to ensure we take full advantage of our strong opportunity pipeline.

We're maintaining the bench that we built over the past year and our growth platform leaders are moving out against their plans and our on track for a more even quarterly spend this year. This flatter spending profile for the year also leads to a more balanced margin profile for FY16, with relatively lower margins in the first half and relatively higher margins in the second half as compared to the prior two years.

With that, please turn to slide 5, and I'll walk you through the drivers of our results for the first quarter. Starting at the top, as you saw in the press release, revenue increased 2.2% year over year and was driven primarily by an increase in billable expenses and a headcount that was higher than in the first quarter of last fiscal year.

In the quarter, we saw declines in adjusted operating income and adjusted net income, which were driven by relatively higher indirect spending in the first quarter, as we planned and as we indicated would be the case on our last earnings call.

Reductions in adjusted EBITDA and corresponding margin percent were driven by the same factors, excluding the effect of a decrease in depreciation and amortization expense. I will also reconfirm our long-standing objective of expanding the adjusted EBITDA margin percentage by 10 basis points annually.

Turning to backlog, book-to-bill was 0.92 times for the quarter, which is up from 0.88 times in the first quarter of last year. We saw a slight increase in funded backlog and a slight decline in unfunded backlog.

Turning for a moment to cash, let me highlight the four primary drivers of the decline in the balance at the end of the first quarter of FY16 as compared to the prior-year period. First, cash from operations declined by $72.6 million, primarily due to the timing of payments and receipts during the quarter, which we expect to reverse during the remainder of the fiscal year.

Second, consistent with our goal of keeping share count relatively flat over time, we took the opportunity to repurchase 1.2 million shares on the open market during the quarter. This used approximately $30 million.

Third, our CapEx spending increased by $10 million over the first quarter of last year. The increase was for leasehold improvements as we reconfigure our facility's footprint in the Washington, DC Metro area. We expect CapEx to be $60 million to $70 million in FY16, primarily as a result of this effort. Over the long term, we still expect CapEx to run around 1% of gross revenue.

Fourth, we had a $10 million increase in principal payments on our debt as compared to $0 in the first quarter of last year. Last year no principal payment was required as a result of our May 2014 amendment to our credit agreement.

Relative to our capital deployment priorities, I want to be clear that our priorities have not changed: maintaining our regular recurring dividend, pursue strategic acquisitions of capabilities that can serve as a force multiplier for organic growth, special dividends when cash builds beyond near-term needs, share repurchases to keep share count relatively flat over time, and finally debt pay down beyond the principal payment requirements in our credit agreement.

Let's turn to slide 6. As you saw in the press release today, we are reiterating the FY16 top- and bottom-line guidance that we provided on our May 21 earnings call. Horacio mentioned earlier that we are still executing the SURVIAC transition and we are very comfortable with where we are in that process. We are also confident that we will be within the estimated range of $100 million to $200 million in revenue impact that we provided in May.

At this point, the key variable impacting our revenue is the gap between when SURVIAC work ends and when the replacement work is awarded. Given that the contract ended on July 8, this gap, and therefore the majority of the revenue impact, is going to occur in the second quarter.

I also want to note that given the strong demand signals we are seeing in the market, it is currently our intent to, for the most part, retain staff who are temporarily impacted by this timing gap. This has already been factored into our annual guidance.

We need to see how the tail-end of the transition plays out, and we expect to have a clearer picture by the end of our second quarter. We plan to provide an update on the transition progress on our second-quarter call in late October.

For the full FY16, we expect revenue to be roughly flat, with a range of 2% growth to a 2% decline. At the bottom line, for the full year, we are forecasting diluted earnings per share to be in the range of $1.55 to $1.65 and adjusted diluted earnings per share to be on order of $1.60 to $1.70.

Now, I'll turn it back over to Horacio and he is on slide 7.

Thanks Kevin. As I mentioned at the top of the call, we are focused on executing our plan for the year while investing in the future. I'd like to spend the next few minutes updating you on the progress of Vision 2020, on our innovation agenda more specifically.

Our growth platforms include systems delivery, engineering, cyber, innovation, and the commercial and international markets. We already see parts of these businesses delivering healthy growth and margin enhancement. As our platforms mature, we are reconfirming the power that comes from integrating them with our traditional strengths.

We already hold a differentiated position in the federal market due to our people's education and knowledge of our clients' mission, as well as our reputation and intellectual capital as the government's premier consulting firm.

Our growth platforms enhance these positions by expanding and extending our ability to serve clients and create more powerful solutions to their challenges. We're also winning new clients in both governments and commercial, because of our expanded capabilities, which are further bolstered by our brand reputation and top-notch talent.

Within our growth strategy, the innovation agenda is a foundational platform that extends horizontally across the Firm. It supports our efforts to [be with] more of our business to high demand areas that require groundbreaking solutions.

As background, more than two years ago, right in the middle of the market downturn, we made a big investment by establishing our Strategic Innovation Group, or SIG, under EVP, Karen Dahut. The SIG has developed a clear and focused innovation agenda, and in a relatively short period, already achieved a great deal.

First, we're developing new services, products, and technology platforms that allow us to serve clients in ways nobody else can. These include next-generation technology platforms using digital, mobile, cloud and open source capabilities; data science solutions that transform the way our clients conduct their business; predictive intelligence tools to protect organizations from cyber and other threats. The list goes on and on.

Second, we're forming a network of alliances that span the who's who of technology as well as creative and innovative start-ups, positioning Booz Allen as a translator who can pragmatically target these new technologies to solve key mission challenges. And third, and importantly, we're transforming our own culture, making ourselves even more attractive to a new generation of talent who posses some of the most sought-after skill sets.

We believe that the results of these investments will have long-term extraordinary impact on our business. But the results aren't just for the future. Our innovation agenda is helping drive growth and profitability today. Let me take a moment to describe the sources of near-term value.

First, SIG innovation to clients creates what we call stickiness, meaning it solidifies and expands our work for them in a competitive market. For instance, Booz Allen earlier this year won a three-year $39 million task order under the Department of Homeland Security's Continuous Diagnostic and Mitigation program, known as CDM. It provides tools and services that help federal civilian agencies identify service security vulnerabilities more quickly.

Through the program, we are supporting DHS, the General Services Administration's Federal Systems Integration and Management Center, and seven departments and agencies, including 63 organizations within them, each with unique needs. Clients will have the ability to make decisions to prevent and mitigate cyber threats more quickly, with a better understanding of the risks.

Our Predictive Intelligence platform was not just a major innovation but was also a major differentiator in winning this work. And we're using the same approach with other government and commercial clients to do things like fight financial crimes, assess insider threats, and protect facilities and other infrastructure.

Second benefit of our innovation agenda is that it allows us to create new businesses and place long-term bets on truly groundbreaking technologies. I will use the work of Epidemico, Inc, the small health analytics firm we acquired last year, as an example.

Epidemico is working with our clients GlaxoSmithKline and the US Food and Drug Administration to develop a platform that tracks adverse outcomes for drugs and vaccines using social media sources such as Facebook, Twitter and online health forums. This approach enables near real-time identification of adverse events, which today can take months to identify through traditional channels.

We're taking this capability to other commercial and government clients who see great potential from benefit from decision-making with data mined by Epidemico and this capability is clearly applicable to other market segments such as food safety and automotive.

The third benefit of our innovation agenda is that it is reinvigorating a culture innovation inside Booz Allen, and in today's world, that is a crucial differentiator when it comes from recruiting and entertaining highly skilled, creative and engaged talent. Our large cadre of data scientists is a proof point. Five years ago, few people knew what a data scientist was, but Booz Allen did, and now we have more than 500 of them, one of the biggest concentrations of data scientist in any single organization.

This spring, our data scientist team co-sponsored with Kaggle, the first ever national data science poll. The competition attracted more than 1,000 teams and 15,000 submissions across from the world. And in the end, the winning algorithm was a major advance for both data science and marine research.

Our data scientists are driving amazing advances like this every day, and at the same time, they're helping to showcase Booz Allen as a destination for bright minds, creative thinkers, and strong leaders.

The great thing about innovation is that it is not linear, but the early results with clients, with people, and yes, financially, reinforce our vision of reaching for growth through innovation. We believe that it will transform our Company and the work of our clients, and ultimately, it'll help us maintain our position as a disruptor and a leader in our industry.

With that, Curt, it is time to move to Q&A.

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

(Operator Instructions)

Carter Copeland, Barclays.

Just I wondered if we could ask a couple questions here and dig in just to the SURVIAC impact. I wonder if you could quantify how much of the work moved over to the new HD TAD and NDS TAD vehicles, and whether or not that was immediate upon the ending of the previous structure?

Carter, I'll take a shot at that. While we probably won't give you specific numbers, it's important to understand that the transition process. There is really three parts to it. The first is we had to replace the ceiling of the SURVIAC contract. That means moving the work to new or existing contract vehicles and we've succeeded on that front.

The second phase is we have to transfer the work onto those vehicles and a lot of that work is transferred already, but a portion is still in process. As we expected there are some timing gaps between when SURVIAC ended and the new work begins, which is, for the most part outside of our control. And as I said in my prepared remarks, those gaps are a key factor in estimating the revenue impact for FY16.

The third piece is comprised of recompetes that are currently underway for new contracts for major task orders. These offer not only the opportunity to replace SURVIAC work but also to include a broader scope of work that gives us the chance for expanded revenue growth in the future. We expect these recompetes to be awarded during the remainder of the fiscal year.

The bottom line is that we're pleased with our progress so far, even as there are some unknowns about the timing of the follow-on work. We're confident that the estimated revenue loss will not exceed that which was already factored into our guidance for the year. And I'll also highlight something I said during the prepared remarks, and that's given that the revenue impact for the year is predominantly driven by the gap between when work ends and the timing of the new awards, we would expect to see the majority of the revenue drop in the second quarter.

We'll give you an update on our October call. But I do want to highlight that our success to this point really demonstrates the agility of our business and the strength of the relationships that we have with -- our people have built over time with our clients. This is when the concept of essential partner becomes reality and it's clear that our clients are relying on us to continue with mission-critical work.

Just as a couple of follow-ups, those comments -- the work that's moving to new vehicles that aren't in the new IAC structure, should we just assume that those -- I don't want to say linearly, but have a regular cadence to how they get moved over, over the course of the year? Then with respect to the comments in your prepared remarks around margins, how should we think about the impact of the staff that you're going to retain while you work through the gap?

Well, there's a couple parts to the question right. We with the demand singles we see coming from our clients, we mentioned the proposal activity pipeline et cetera, et cetera. It doesn't make sense not to carry those folks. The majority of them are already targeted or have moved on to replacement work for SURVIAC, and with the demand signals coming, it doesn't make sense to let those folks go, frankly, and then try to rehire to support the backlog that we think is coming.

So it will impact margins in the second quarter but we planned for that and we haven't changed our annual guidance. We're very comfortable with the revenue impact we gave you. We mentioned earlier that it's primarily in the second quarter and we are very comfortable with the guidance for the year at this point.

Okay. Thanks. I know there's a lot of moving parts, so we appreciate the color.

You're absolutely right.

Bill Loomis, Stifel.

Just jumping on SURVIAC again. It sounds like -- have you lost any contracts on the transition? It sounds like -- you've talked a lot about the gap but have you actually not been successful on any of the tasks so far?

For the most part, Bill, we've been very successful. There may have been one or two small tasks where a client decided to stop work, but we've moved work to a variety of contracts, not just the original three of HD TAD -- or HD and Homeland Security [Mat] contracts, as well as SNIM. We've had Alliant, FEDSIM, many different contracts, so we've been very successful moving that work and we're pleased with where we are and where we think we will be at the end of the process.

Hey, Bill, if I can just give a little more color and maybe try and round out this discussion on SURVIAC because part of what are challenge with, is we want to make sure that you have all the information available to you but we don't to give you more than we have. Some of this is still in process, but to emphasize, we've already replaced all the ceiling. The work is moving really smoothly and on schedule and there's a couple of recompetes out there.

Some work has moved on to transition contracts or bridge contracts and there are some recompetes out there, that we will finalize the work. We feel confident about where all of that stands, and as Kevin said, these are competitive procurements, but on the other hand, in many cases they are larger than the original procurements [or their sub-side] to that, as well. So all in all, we are confident that the guidance that we gave is the guidance that we should have given. And at the same time, I have to say, if I can take a moment, I'm extraordinarily proud of the execution by the team on this. It's -- there's a lot of moving parts -- it is a very challenging thing to do and it's been done truly brilliantly.

When you say recompetes, are you talked about just your recompetes or are you talking about the other IAC contractors' recompetes that you may be looking at?

We're competing hard for every piece of work that's out there.

Okay. So there is a much bigger pie than what you had before and you are bidding a larger group of contracts under the IACs, right?

We are bidding very hard on a lot of things because we see the demand signal as being strong bid and proposal activity, as Kevin said. I want to expand beyond the SURVIAC discussion because there's -- the bigger message is we're leaning forward into a market where we see more opportunity than we say, we saw a year ago or two years ago, this quarter.

Bid and proposal activity is up. The value of the proposals that we're bidding is up. The length of those contracts is going back to historical norms. We're being pretty aggressive in both going after work, where we believe our quality and our capabilities are a differentiator and we're aggressively holding onto our bench and building bench in places where we think we can grow.

We used to talk five, six years ago about hiring a head of the demand. We stopped talking about that because, frankly, demand was too unpredictable. We're not back to those days completely, but we are making sure that we have the people that we think we are going to need to capture the revenue as it comes.

Okay. Great. Thank you.

Jon Raviv, Citi.

Horacio, I wonder if you could talk about how much of the growth you're seeing right now is just from an overall better market versus your unique positioning and your capabilities and investments boosting your ability to take some share?

What we're -- if I can describe what I believe were seeing is, we're seeing a market where it's not like there's a ton more funding, and you know the overall budgetary issues that the country is still wrestling with. There's no expectation that the overall budget is going to rise significantly or anything like that. But we are seeing, as we've mentioned in prior calls, our clients having the ability now to look out beyond four or six weeks into longer time frames and begin to plan and execute their missions.

And against that, we are seeing opportunities to then apply what is unique about Booz Allen what's great about Booz Allen to help them. One of the trends that we've talked about in the past was this big move towards LPTA. It's not like that's all LPTA contracts have ended and none of them, no more will be competed, but we are seeing a return in critical areas to best value, and we are certainly -- we believe we're the best value Firm out there. And so overall, what I would describe to try and summarize is we are in the process of gaining share against a competitive but improving market.

Great. Thanks for that. And just as a follow-up on M&A appetite, how do you think about -- you talked about acquiring as a force [to multiply] organic growth. How you think about that bucket of M&A versus the idea of gaining scale and what does that thought process imply about potential bite size in the market?

Maybe, I'll start. Kevin, you probably want to add to that. Kevin talked about our cash deployment priorities and I'm sure he will want to talk to you more about that. But as far as I'm concerned, the market as I see it, rewards quality, rewards agility, and rewards focus. We are the best quality Firm out there. We've demonstrated the ability to be agile and move to the places where the demand is going to be and we have demonstrated that we are focused.

We're not trying to be all things to all people and play from the high-end quality all the way to the commodity spectrum because anybody who tries that is going to get hurt. I long felt that we have both adequate -- more than adequate scale and more than adequate client access so we're not out seeking for that.

We're seeking for those force multipliers that will create more ability for us to grow organically and that's really what we're after and we're extraordinarily selective. We look at a lot of things, and we, as you know, do very, very few of them. They tend to be smaller. They tend to be very focused. That's what's made sense to us in the past, but it's going back to quality, agility, and focus is what the market is going to reward and that's where we play it from a position of strength.

Horacio, if I can just add to that. The key point there is we are at scale. Our infrastructure is sized to be scalable beyond this point but we don't need to achieve greater revenue just for the sake of greater revenue. We've said this since we started talking about M&A a couple of years ago. We're focused on buying capabilities that could be a force multiplier, to use your words from a couple of minutes ago.

That does tend to have us focus more on small- to mid-sized deals, which are the types of deals that we've done over the last two or three years and so we will continue down that path. We grow a lot of capability internally through our Strategic Innovation Group, as well as our market teams. So between adding those capabilities from the outside from those small- and medium-sized acquisitions with our own organic capability development, I think it's going to continue to reward us on the long-term.

Thank you very much.

Steven Cahall, Royal Bank of Canada.

Maybe the first question is on those demand signals that you talked about. I was wondering if you could give us a little more color as to any of the particular pockets of the market: defense, intelligence, commercial international, et cetera; where those are strongest or are the most different from where they've been in the last few quarters, if they have?

Hi, Steve it's Kevin. It's broad-based. We have significant bid and proposal activity underway. Clearly, we had it in Q1 as we tried to move some of the SURVIAC work, but it's much more than that in the defense and intelligence space. We see very high bid and proposal activity in our civil space especially in the health account, including VA as well as other subagencies.

And obviously, as you know, we're continuing to pursue a lot of opportunities in the commercial and international space, so I'd be hard-pressed to point to an area where were not seeing the demand versus the opposite. And that's certainly unlike the way it's been in the last couple of years.

So with the -- maybe billing is just down a little bit the year on the SURVIAC transition, does that give you confidence that you'll probably hit a 1-to-1 book-to-bill for the year?

Clearly, that's always our goal. I do feel good about backlog potential in Q2 specifically. We haven't had a 1.0 book-to-bill for several years now, so I do feel good about that goal but it'll be primarily driven by what we see here at the end of the September quarter.

Okay. And then maybe just a question on cyber. A couple of your peers, Raytheon and ManTech have gone different directions with their cyber franchises, one buying a company, one spinning out what it has and putting it with the commercial. So when you think about the commercial cyber opportunity for Booz Allen Hamilton, what go-to-market strategy do you think about and how do you think this might develop over the next couple of years?

That's a great question. That's still very fluid, not so much in our thinking, as it is in the market. Demand is clearly growing significantly and we are increasingly better positioned because we've been out there now for several years in our commercial international efforts building the channel, building the client relationships, building the reputation, helping them solve some of the issues that have been in the paper.

So we see upside from that. The precise way in which that market will evolve is, I think is hard to predict, to tell you the truth. We're keeping our options open, but we're driving very, very hard, not just against the protection of computer networks, which has been what a lot of cyber has focused in the past, but also against the protection of physical assets.

You saw the recent articles about cars being hacked. There was an article that talked about the IoT, not as the Internet of Things, but the Internet of Targets. There's market opportunity there and we are working with clients and this is where innovation -- again, our innovation agenda plays a significant role because we have the ability to play across all of that. But these are relatively small nascent efforts still within Booz Allen, the commercial side. On the federal side, of course, they are larger and more mature. And like I said, we're keeping our options open for how to execute them most effectively.

Okay. That's helpful. Thank you.

Sure.

Edward Caso, Wells Fargo.

I noticed that over the last two years or so, there's been a steady increase in your exposure to fixed-price contracts. Could you give us a sense what kind of contracts they are and whether your increasing the risk profile of the Firm? Thanks.

Hi Ed, it's Kevin. You're right. The fixed rice percentage of our work is up a bit over the last couple years. It's a lot of different types of work. Early on, the current administration thought that fixed pricing everything made a lot of sense, and so that's accounted for some of this increase, even though we may not be doing anything different than we did on a cost reimbursable contract prior to that. We also have some software development contracts that tend to be fixed-price, so it's not just in one type of work where we see that.

I would also say that fixed-price is our most profitable contract type. To your point about risk, if you don't manage them well, it can be the most expensive contract type from a write-down perspective. But we managed that very well, we have a good process internally, and we're really not, in our opinion, increasing the risk profile of the Firm. And the final thought is we don't drive the contract type really, the client does, so if the client decides it's fixed-price and we're willing to look at the risk of that procurement, then we feel very comfortable with that type of contract.

I will just add to that by saying our mantra is sustainable quality growth. So we're not doing anything in the near-term that puts -- to just buy revenue or to create undue risk or looking for both contract types and contracts and work that maximizes our ability to serve clients and grow sustainably over the long run.

Right. My other question is on the cash flow. Kevin, if you could give some more color on the more modest level this quarter and whether you're comfortable in reaching or exceeding 120% of net income in FY16? Thanks.

Well, there's a couple components to that answer, Ed. The first is if you look at our balance between last year this time and now, we've had a couple events that we didn't have in prior years. We purchased -- made three purchases of, share purchases, I should say, two through Carlyle block trades and then this most recent purchase on the open market in our first quarter.

We also had a one-time executive comp payout last fall -- again, one time on that, and then we had some acquisitions last October, as well. So when you look at all that, it explains the balance year over year as being a little bit lower than it would have otherwise been. From 120% of adjusted net income conversion, that's our long-term track record. It would be very unusual for us to be below 1.0 for a year but we'll look at it as the year goes on and maybe be able to give you a little bit better guide as we get further into the year. But right now that is still our long-term objective.

Okay. Thank you.

Denny Galindo, Morgan Stanley.

Just wanted to touch back on the M&A question. There's a number of assess that could be spun off this year. Recently there's talk about the Lockheed IT group. And you mentioned how you primarily focus on capabilities which would lead you to the smaller acquisitions but I was wondering how you would think about a bigger acquisition? How would you think about the synergies that there might be? And then if you don't end up acquiring them or if it ultimately ends up that there is more standalone companies out there, how do you think this would affect the competitive pressure in the marketplace, the pricing pressure, and the pressure to win contracts?

Those are all great questions. Let me try and take a swing at them. Let me start by saying, we are in this market. We've been in this market for a long time. We look at everything that happens and pay close attention to it and evaluate opportunities. I don't want to comment on anything specific that may or may not be going on, only that to say that we have a clear strategy.

It's focused and we're not going to do anything that derails us from that. We're not focused at this point on -- you can never say never but we're not focused on this point on any of those large things that may or may not come to market. As it relates to what would happen if -- what we're seeing in the market is a number of things. Some like the A&D product manufacturers are focusing their portfolios. There's a number of private equity firms who have investments that are maturing. All of those things are putting things in play.

We don't expect there will be significant consolidation as a result. There's going to be a lot of new entrants. In fact, that's what were seeing, in terms of financial sponsors and people like that. And at the end of the day, we compete with those firms today. We compete very successfully, and as I said earlier, I believe the market in which we compete rewards quality, agility, and focus. We're not going to do anything that takes us away from that and we're operating from a position of strength and we'll continue to do so.

And then secondly on a different topic, on the commercial international, with all the cyber news, we've been thinking that you'll eventually see some traction there. And if I remembered correctly, you also hired some new partners in the last couple of years who are just now able to sell after non-competes are over. Can you give us an update on commercial and what's happening there whether it's in cyber somewhere else?

Sure. You're right, last summer we hired a number of partners and vice presidents in the Mideast and they had non-competes and non-solicitation agreements that carried through pretty much the end of the calendar year. So they're out selling heavily now and the business seems to be ramping as expected.

US commercial, same thing. We've been at that a little bit longer. It is a little bit more mature. You're right about commercial cyber. The phone does ring quite a bit and we're very comfortable with the progress we're making there, not only in the cyber area, but also in our health analytics area and some of the work we're doing for some major energy companies, as well. So it's not all cyber in the US commercial and international markets, which is the good news for us.

A follow-up on that. Is there any plans to disclose more information about the progress of some of those business lines?

We've always said that once it got to be a fairly significant part of our overall portfolio, we might give a little bit more color. While it is growing faster than the government side of the business right now, it's still not at the point where we want to talk that much about it. But what we do is every year in the [K], we talk about the percentage of the commercial and international business to the whole. And Curt, keep me honest here, on a combined basis last year, the commercial and international market grew something like 20%.

Yes.

18%, 20% something like that.

18% last year.

Again, we're very pleased with the growth and we would expect it to continue to expand.

Thanks for taking my question.

Brian Ruttenbur, BB&T.

Thank you very much. My question is going to be short. In the second fiscal quarter, do you expect revenue and earnings to be down more so than third fiscal quarter? It sounds like that's going to be your big hit and then you should see some rebound to both revenue and earnings in the third fiscal quarter?

Brian, I'm going to change my practice this one time. Number one, you're new, and number two, it's important because the SURVIAC transition, to talk about it just this once in that we do feel like we're going to have a very strong second half and that most of the SURVIAC impact will be on the second quarter. Again, we don't normally talk quarters, but given the transition for SURVIAC, it's probably about as far as I'll go, but I'm glad you asked the question.

Great. Thank you very much.

Michael French, Drexel Hamilton.

I'd like to return the discussion to the increased bid and proposal activity. I believe Horacio said that you guys are being aggressive in areas where you have capabilities and they are well known and you're also building out the bench. I was wondering if you could elaborate in those two categories, where specifically you're being more aggressive and why?

I'll start since I made the original comment. I'm not sure there's much more to say other than we see -- a year ago, two years ago, when you were at this point in the market, you were worried about things like government shutdowns. Our clients didn't know what funding they were going have. It is -- the budget situation is still not perfectly clear at this point, right?

There isn't a final defense authorization bill for next year, for example. But it certainly feels more stable and our clients feel like they have more control over their funding and their budgets and they are signaling demand or asking for more work and more proposals and we are out there working it very, very hard. Whereas two years ago, maybe we were more worried about getting caught with too many people in the government shutdown, now we want to make sure we don't get caught without enough resources to meet what could be significant demand.

That's really the -- it's more of a nuanced balance than anything else, but it's an important one and it's why I keep coming back to this issue of focus. I keep coming back to we don't want to get distracted by whatever else other competitors are doing in the market. We don't want to get distracted by other things.

We want to make sure that we're driving our strategy, that we're driving our business hard, that we're executing well. The first quarter is the story of excellent execution on all fronts. The second quarter will continue to be that, and all geared toward this long-term view of sustainable quality growth and making sure that we're doing that and we're doing that well.

Okay. Thank you. And as a follow-up, maybe you can address any recent trends regarding your win rates and whether you're seeing market share gains or losses?

We usually talk about our win rates annually in the K, but our recompete win rates are right in that 90% range. New work is somewhere in the 50% range, mid-50% maybe. And when you look at our top-line growth versus others, we're generally either growing faster or shrinking slower, so I'd have to say to net/net that we are taking share over the last couple of years.

Great. Thank you.

Thank you. There are no further questions. At this time, I would like to turn a call back over to Horacio Rozanski for closing remarks.

Thank you, Shannon, and thank you, everybody, for the questions and for the rich conversation. As I said before, this is a quarter where we demonstrated great execution against our long-term plan, both for the year and beyond. And it's an exciting time to be part of Booz Allen, with the market a little more stable, with new client problems to solve, expanding capabilities right here in the Firm.

So we're forging ahead on both our annual and long-term plans, always with an eye towards creating sustainable quality growth. Our people feel tremendously energized by the opportunities that lie ahead and we're pleased to share our progress with you each quarter. Thank you for joining us.

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