Booz Allen Hamilton Holding Corp (BAH) 2017 Q2 法說會逐字稿

Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering second-quarter results for FY17.

(Operator Instructions)

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

Great. Thank you, Kaylee. Good morning, and thank you all for joining us for Booz Allen's second-quarter FY17 earnings announcement. We hope you have had an opportunity to read the press release we issued earlier this morning. We've also provided presentation slides on our website, and are now on slide 1.

I'm Curt Riggle, Vice President Investor Relations. And with me to talk about our business and our financial results are Horacio Rozanski, our President and Chief Executive Officer, and Lloyd Howell, 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 will discuss this morning will include statements that may be considered forward-looking, and therefore are subject to known and unknown risks and uncertainties which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our Company's services, and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our second-quarter FY17 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 second-quarter FY17 slides. It's now my pleasure to turn the call over to Horacio Rozanski, our CEO, and he will start on slide 3.

Thank you, Curt. Good morning everyone. Thanks for joining us. Today we're very pleased to report that in the quarter ended September 30 the people of Booz Allen turned in another solid performance. Their success in capturing opportunities and delivering high-quality mission-critical work to clients continues to support our accelerating growth and our strategy for the future.

The fundamentals of our business are strong. We're seeing and capitalizing on healthy demand from clients for managing their operations with agility. And we're leveraging substantial recent investments in growth areas to bring clients comprehensive solutions that combine our consulting expertise and broad mission knowledge with the most advanced technologies. As we begin the second half we're on track to finish FY17 as planned. And we remain confident that our long-term strategy will lead to sustainable quality growth.

Let me discuss briefly an item that's been in the news. As you know, a former employee of Booz Allen is under criminal investigation. As we have communicated previously we fired the employee as soon as we learned of his arrest and have been cooperating with the FBI investigation.

In the weeks since the government made the case public we have been reaching out to clients and other stakeholders. They're supportive of our efforts to cooperate with the government's investigation and to keep them informed. And we intend to stay close in touch with them, as we always do.

To date there has now been no material impact on our business from the alleged criminal actions of this former employee. Booz Allen has been built on 100-year record of client service, dedication to excellence, and adherence to the highest ethical standards. We are extremely proud to support our country's civil and national security missions. And we take the trust that all of our clients place in us very seriously. We work to earn it day in and day out.

In addition to cooperating with the government's investigation I have asked former FBI Director Robert Mueller to conduct an external review of the Firm's security, personnel, and management processes and practices. If there are things we can learn, we want to know about them.

Constant improvements is in Booz Allen's DNA. Every day we help clients find a better way. So we strive to apply that same approach to all aspects of our own operations, in good times and in challenging times.

As I have often told you, we concentrate on being agile and practically manage the things we can control. For the nearly 23,000 people at Booz Allen, that means delivering our best work to clients, serving our communities, and effectively building and executing the business to create value for investors. We will maintain our focus on all of those things.

For the balance of the fiscal year we will continue to push forward with our near-term FY17 and our long-term strategy for growth. We will continue to run proper work on contracts and hire the talent we need to deliver what we have promised to clients. We will keep pursuing opportunities that apply the full range of our expertise. And we will further invest in capabilities, markets, and people.

Also we will manage the business will with one foot in the present and one foot in the future. Those are the things that our clients and shareholders rightly expect, and they will help Booz Allen and our people continue to thrive. With that, let me turn the call over to Lloyd for a detailed discussion of our second-quarter results.

Thank you, Horacio. Please turn to slide 4. I will start with a few big picture points. First, with half a year behind us, we feel good about where we are. As we've discussed in the past we run our business on an annual basis. To date the Company's financial performance aligns well with our FY17 plan.

Second, we're managing operations with flexibility so that we can anticipate and adapt to changes, mitigate against risk, and take advantage of opportunities as they arise. Third, the market continues to signal demand and is rewarding us for our differentiation. Or put another way, clients across our diverse business areas recognize that Booz Allen offers a valuable combination of skills and knowledge that can help solve their most pressing problems.

And lastly, our financial results demonstrate that investors can count on us to set a plan and execute against it with discipline and focus. We do what we say we'll do, and in the near term and over the long term.

Let me run through the specifics of our second quarter. Please turn to slide 5. At the top line we reported our third consecutive quarter of healthy organic revenue growth, 5.5% above the same period last year. We're moving out strongly against the backlog, hiring and deploying additional people, and increasing productivity in response to client demand.

As you know, we have been working hard to recruit and hire talented professionals in a very competitive market. Hiring people with the right skills and deploying them quickly onto contracts is, of course, essential to support revenue growth this year. But just as importantly, it would enable the year-over-year acceleration in growth that we are aiming for.

During the second quarter, thanks to a lot of effort put forth by leaders across the business, we increased headcount by more than 230. We're bringing on people with expertise in all of our functional areas. And we're pleased with the increases we're seeing in high demand technical skill sets.

I would note that the year-over-year increase in headcount exceeds 500. That growth, along with improved billability and an increase in billable expenses, drove the year-over-year revenue gain. For the full fiscal year we expect billable expenses to be between 29% and 30% of gross revenue. And our efforts to increase headcount will continue throughout the year.

Moving to the bottom line, the results reflect both improved revenue and better management of our indirect costs since the beginning of the fiscal year. When compared to the prior year -- I'm sorry -- when compared to the prior-year period, adjusted operating income for the quarter was up 11%. Adjusted net income increased 20%. And adjusted EBITDA rose 9.3%. Adjusted EBITDA margin was 9.7%. And adjusted diluted earnings per share for the quarter was $0.46.

Backlog is another indication of our tactical and strategic success to date, as well as prospects for the future -- for future growth. As of September 30 our total backlog was a record $13.6 billion. The total represents an 8.7% increase over last year, and that has been our highest backlog total in nearly three years.

You will recall that a year ago in the first and second quarters we worked very hard to win new business after transitioning off of a large long-term contract. To have exceeded that effort a year later is a great accomplishment for us. It demonstrates clearly that our clients value the quality of our people and the differentiated solutions we offer.

I will also point out that the growth is more evenly distributed across funded and unfunded backlog and priced options. This is our second consecutive quarter in which both funded and unfunded backlog rose. Funded was up 2.7% from the year-ago level and unfunded was up 13.5%.

Priced options were 9.6% higher than the same quarter last year. Booked to bill was 2.17 times. Keep in mind that number follows the best first quarter booked to bill we have had in five years.

Our opportunity pipeline also remains healthy, with contract durations continuing to lengthen. We are intently focused on capturing opportunities that apply our consulting expertise and the investments we've made in system delivery, analytics, cybersecurity, and engineering. As we succeed in those efforts we're building a rich portfolio of services and solutions to scale across the business so that we can sustain high-quality growth into the future.

Next let's turn to cash. Our cash position continues to improve due to both revenue growth and better cost management. In addition our cash position at the end of the second quarter reflects strong conversion of revenue to cash and a reduction in required tax payments in the quarter.

As a result of these differences from last year, net cash provided by operations in the first half of FY17 was 145% higher than in the first half of last year. We are also adjusting downward our expectations for capital expenditures for full fiscal year, and now anticipate CapEx in the range of $55 million to $65 million. As a result we now expect our adjusted net income to free cash flow conversion rate for the full fiscal year to be in the range of 95% to 105%.

Before opening the lines for questions, I will note that the Company has authorized a regular dividend of $0.15 per share payable on November 30 to stockholders of record on November 10. As you saw, our earnings release this morning we are raising the bottom end of our guidance ranges for the year. The new ranges are shown on slide 6.

We expect gross revenue to increase in the range of 3% to 5%, diluted earnings per share to be $1.63 to $1.70, and adjusted diluted earnings per share to be $1.68 to $1.75. With that, I will hand it back to Curt and then we will move on to questions.

Thank you, Lloyd. Kaylee, at this point can you provide instructions for the question-and-answer portion of the call?

(Operator Instructions)

Amit Singh, Jefferies.

Thank you for taking my question, and great quarter. If I look at your bookings in the last 12 months, they are really strong. I feel that you have the bookings to drive even the upper end of your guidance range. And this quarter the headcount growth was very strong. So where you stand on the headcount? Do you think at this point you're adequately staffed to even come at the upper end of the guidance? Or to achieve that you need to add more people?

Amit, thanks for the question. We're always looking for talented candidates. And as I've said in previous discussions, where we end up in our range is going to be a function of the number of folks that we bring on board. So said another way, we are staffed adequately to execute on the opportunities we have, but to complete the conversion of backlog that we have, we need to bring on more folks In the technical areas of that we've invested in over the past three years. We remain confident in our ability to do that.

Perfect. Just quickly in bookings, was there anything out of the ordinary, any big recompete that came in the quarter or slipped from the quarter to the next?

No. We have thousands of contracts and task orders that comprise our business. And so our success year to date is a continuation of that. So things that we are pursuing in terms of recompetes, we were pleased with the results of that. And we continue to take share of the market, as well.

Perfect. Great. Thank you.

Bill Loomis, Stifel.

Thank you. Good quarter. A couple questions. One, what was the organic growth? Because I think you still had a small bit in there from an acquisition. And then second on hiring, just another staffing question. Your hires are up 1% about sequentially and year over year, but revenue is higher.

You talked about increased utilization. Was the people that you had that weren't billable that were getting training, or you had to bench previously? Why aren't we seeing hiring more in line with what the overall revenue growth is? Thanks.

Let me maybe take them in reverse order. We purposefully raised our billability across the institution, as we've said previously, to begin to convert on the backlog that we were able to build. And so by our different business sectors, it's not necessarily the same billability percentage, but the net result was an increase across the board. That was deliberately planned.

Similarly with the hiring as we begin to be at a net positive position, what we're focused on is really bringing on the skill sets that will be reflective of the work that we've developed and the work we need to convert. And so we're more interested in the quality of the candidates that we're bringing on board, especially at this point as we accelerate growth. And then when it comes to -- maybe I'm forgetting the very first question that you asked. And if you would not mind repeating it, that would be great.

The organic growth for the quarter excluding the small deal you did.

Hey, Bill. This is Curt. On that point, the deal that we did was a non-material deal. We have not broken out organic/inorganic. And I will tell you that at this point it's fully integrated. Almost impossible to do.

Okay. Thank you.

Thank you.

Tim McHugh, William Blair.

This is actually Trevor Romeo in for Tim here today. Thanks for taking questions. First, just any more color on what areas of the business you are seeing particularly strong contract wins?

We're actually very pleased that it's been across the board. The business that I managed prior to this role was our civilian federal business, now managed by -- led by Karen Dahut. We pivoted to what we thought were the priorities of the country. And that has proven to be effective in the growth that we've seen there.

Similarly in our defense market business led by Joe Logue, they have been working very closely with our clients and have seen a very strong business capture season, as well. Lastly in the intelligence market we worked on very mission-oriented engagements. And as a result our clients have rewarded us for that. But across the board the entire portfolio has grown as expected, given our plans for this fiscal year.

I can build on that. It's Horacio.

What I would also say is we're very pleased -- about 4 or 5 years ago we deployed a strategy we called Vision 2022 to drive certain elements of our portfolio, not in terms of which clients, but in terms of which capabilities we were bringing and augmenting and investing in. We're seeing great returns across that from modern software development techniques like Agile and DevOps to the work we're doing in advanced analytics and data science, to some of the leading edge cyber work that we do for clients across all of our business.

It's engineering. I can keep listing them. When you add all of that up we're seeing great success and great growth. And growth that's on strategy, which is I think makes us feel optimistic about the future growth potential, not just what happened in the quarter.

Great. Thanks.

Maybe just one more quick one. With regard to the billable expenses, I think you mentioned it's like maybe 29% to 30% of revenue for the year. Is there anything in particular that's driving that? It seems maybe a little bit higher than historical levels. And do you maybe longer term see that trending a little higher?

Yes. It's really a reflection of the markets that we compete and deliver in. As I said, for the full year we expected to be 29% to 30% of revenue. And it really is a continuation of what we talked about in the past, of the -- our clients have required us to have small business set-asides as a prime. We're doing that. And the result is the percentages that I've referenced.

In terms of the future, my crystal ball is probably as good as anyone else out there. We are going to continue to monitor it and manage it as best we can. But this is the business we are in. These are the clients that we want to support them and their most critical missions. So this is a result of the market that we lead into.

Okay, perfect. Thanks for taking my questions, guys.

Cai von Rumohr, Cowen and Company.

Thank you very much. A quick one. Tax rate was lower this quarter. What would you now expect for the year?

I think we're still planning on it being at 39.3% for the year.

Got it. Thank you very much.

And then on the billables, because the billables are basically labor or materials done by others, does that mean that you really -- so if you look at revenues ex billables, which is a better metric to compare with your direct labor growth, that would seem to suggest with a little bit less direct labor growth you could achieve the upper end of your revenue estimate, given that the billables are higher for the year?

Yes. I appreciate the calculation. When it comes to how we are looking at where we will end up within the range, we're focused on how many quality folks we can bring on board. I think that is important both the near and long term. As Horacio has said, at the same time keeping a foot in the present, we are also focused on the future.

And for us bringing on the right capable skill sets with the right folks who will have a long career at Booz Allen, that's what we're looking at first. And then we expect that if we are doing well there, that will end up putting us within the range that I've put out previously. And if we do it better and better, then we will see work that lands us. But that's what we're focused on.

Terrific. The last one. If we go back to the Mr. Martin incident, this is the second incident, obviously, you guys have had. While I know that OPM really opines the background, obviously they are your employees so that there is some potential impact on you; I guess there could be.

While you haven't seen anything to date, are you nervous that this could have some ramifications? And any preliminary thoughts? I think it's terrific that you have Mr. Mueller doing the investigation, but any preliminary thoughts of what sort of things you might have to change, or might want to change?

I will take that one. What I can share with you is we are in constant communication with all of our clients. We have shared with them the information that we can share. They've been very supportive of the way that we've proactively supported the FBI's investigation and all of the requests of us.

This outside review by Director Mueller is simply the right thing to do for us. It's a way for us to get better. When I sat down with the Director, I made it clear that he has as broad a scope as he needs to have. And that he can look anywhere he needs to look. We want to know what he finds and we want to know what we need to do to continuously improve in this area. There are no limitations or boundaries to what he's going to look at.

Thank you very much.

(Operator Instructions)

Jon Raviv, Citi.

Good morning, guys.

Good morning.

Lloyd, I was wondering if you'd just address how those higher billables impact your ability, if at all, to get back to 10% -- around 10% adjusted EBITDA margin?

In short, with a higher billability and focus on delivery, we're able to generate the DL. At the same time we are also able to -- we have been able to manage our indirect spending that had gotten out of plan last fiscal year. So the combination of the two is creating the margin improvement that we are seeing now in the business.

And keep in mind, I forecasted out for the entire year. So over the course of the year there will be periods where we may decide to invest or to spend because it's the right thing to do.

So we expect margin improvement, as I've said in the past, to occur over the course of the entire year. And we are beginning to see that. But the higher billability plus the management of our indirect spending has contributed to the margin improvements that we are experiencing.

And on that topic, heading into second half, what is your pipeline for spending investments look like? Just because it seems like you're maybe tracking a little bit ahead on the margins. Is that still scheduled to pick up?

Yes. I may not answer your question as directly as you'd like. But at the beginning of every fiscal year, when we make our investments decisions we do it with the expectation that our colleagues will be spending over the course of that year. So it's not a seasonal type of deal.

As a result, what I do is I look at the totality of the year, and are we in alignment with our spend as well as seeing the margin improvement that we expected to see. At this point in the year, we are exactly where we had planned. And we are pleased with the results that we see. So if the question's that regarding a difference in the second half versus the first half, we took that into account at the beginning of the fiscal year when we did our planning. And that is not something that I or the team track necessarily.

Thanks, guys.

Thank you.

Edward Caso, Wells Fargo.

Good morning. Congrats on a solid quarter. Were there any awards of note that you won last quarter, but are not out of the protest period so would show up in the December quarter?

Ed, this is Curt.

Within the backlog that we've reported, as you know we don't report -- we don't add the contracts under protest in that number. I will tell you that it's $345 million of contracts under protest that are not included in our backlog. So we will see how time plays out with that. But that's an idea of the scale of what's not included.

My other question is, is there any unusual level of award fees in the quarter that may have helped or hurt margins relative to, say, a year ago?

No, not that we've seen.

Great. Thank you.

Thank you.

Brian Ruttenbur, Drexel Hamilton.

Thank you very much. Anything unusual that you see happening near year end in terms of backlog or bookings that would happen, given it's a Presidential election year, as we all know? Do you see anything dropping more so or less so in this third fiscal quarter?

I will try and take that. I think the -- we have not seen our clients either slow down or speed up because of the Presidential election. They're focused on mission. They're driving against their missions. We're supporting them that way. As you know as well, we don't manage the business quarter to quarter. We manage for the long term. And that's what we're focused on. That's what we're focused on doing with our clients.

We don't expect anything either extraordinary either way as a result of the election. We will all go out and vote. We'll listen carefully to what happens. And then we will look for ways to align ourselves to the country's agenda to make sure we are supporting the right priorities.

The only thing I would add is we do very little policy work, which is usually subject to the political winds of the country. As we have long stated, our invested areas -- areas we invested in, skill sets we're looking for are politically agnostic. The programs we support, the missions of our clients are also politically agnostic. So in terms of the results of the election, I will just echo what Horacio just said. We are not anticipating a significant impact to our portfolio or the work or our future strategy.

Okay. And then second question real quick on capital deployment. Any changes to capital deployment? Is it primarily dividends, and what are your priorities in rank order right now? And have they changed?

The topics, the areas on our list remain the same. But as we are pivoting to stronger financial performance, as I mentioned in my opening comments, with the improvement on our cash generation we are evaluating those priorities, the priorities that we currently have.

So at this time I'm not prepared to give you a different ranking than what I've done in previous quarters. But you should know that we are looking at it, and we will adjust accordingly given our financial performance.

Thank you.

At this time I would like to turn the call back to Mr. Rozanski for closing remarks.

Thank you very much. And thanks everyone for your questions. I hope Lloyd and I have made clear the strong fundamentals of our business and the optimism we feel about Booz Allen's people to grow. This is a conversation that is largely about numbers, and so it's very difficult to convey the energy, imagination, and dedication of the people of Booz Allen while we do this, but they are what drives our firm forward year after year.

I've had the great privilege to spend more than 24 years here. Even after all that time I'm constantly amazed and inspired by what our people do, their values and expertise, their dedication to clients and our country, and their deep sense of purpose. There's a true spirit of service and generosity inside Booz Allen, a deep desire to solve problems and to make the world a better place. You see it in how our people approach their work and their commitment to each other and the communities where they live.

Just to give you an example. This summer we had 320 interns in nine cities participating in our revamped internship program. It was a fun, creative, and competitive program that had 6,000 applicants this year. The interns work in teams on projects that aim to solve tough client or societal problems. This year's projects, including use of virtual and augmented reality to alleviate chronic pain, analyzing data to understand the urban flight, creating an app to help military commanders assess open source information in real time, and building an executive dashboard to track the health of an organization, a very broad range of topics.

At the end of the summer we selected a winning team. This year's winner developed wearable technology that uses GPS and 3-D cameras to help the blind navigate more independently. We're now looking to form partnership with the National Federation of the Blind to take the project forward.

I've taken you through this program in some detail because it's a perfect microcosm of Booz Allen and what we are all about. It really captures our commitment to solving problems in new and powerful ways. That is the Booz Allen I know.

And so I will close by simply thanking the thousands of people who not only ensure the Firm's success from quarter to quarter, but more importantly who show the best of our Firm to clients, strategic partners, and local communities each and every day. Thank you, Booz Allen. Keep making us proud.

And to everyone else on the line, thank you for joining us and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a wonderful day.