Booz Allen Hamilton Holding Corp (BAH) 2017 Q4 法說會逐字稿

Good morning. Thank you for standing by, and welcome to the Booz Allen Hamilton's earnings call covering fourth quarter and full year results for fiscal 2017. (Operator Instructions)

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

Thank you, Nichole. Good morning, and thank you for joining us for Booz Allen's Fourth Quarter and Full Fiscal Year 2017 Earnings Announcement. We hope you've had an opportunity to read the press release that we issued this morning. We've also provided presentation slides on our website and are now on Slide 1. I'm Curt Riggle, Vice President of Investor Relations. And with me to talk about our business and 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 fourth quarter and full year fiscal 2017 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 forward -- the information discussed on today's 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 on -- in our fourth quarter and full fiscal year 2017 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, and good morning, everyone. Thanks for joining us. Each quarter on this call, Lloyd and I feel privileged to represent the exceptional work of our 23,000 colleagues across Booz Allen. And the strong fiscal year 2017 results we report today are a point of particular pride, because they demonstrate success that has been built by our leaders and our people brick by brick and over the last several years. In that time, we designed and operationalized a long-term strategy for growth that has primed our firm for a very bright future.

As you saw on our press release this morning, we had a great fourth quarter, allowing us to deliver better-than-expected results for the full year. Our FY '17 performance demonstrates the fundamental strength of our business and confirms Booz Allen's position as the industry's organic growth leader. Our record of growth is grounded in a virtuous cycle. It begins with our commitment to adding exceptional value to clients at the core of their mission priorities. Because we work so closely with clients, we can identify and invest in innovative capabilities that will be in high demand. This positions us to win additional work and attract the right talent, which leads to strong financial performance and the generation of outstanding shareholder value; that in turn allows us to continue to invest in differentiated capabilities and opportunities for our talent. And as the cycle repeats, Booz Allen's capacity to create short- and long-term value for clients, shareholders and our own people continues to expand.

For much of the call today, we will talk in depth about our numbers. But the numbers for FY '17 tell only a part of the story. The other part is the qualitative progress we have made last year operationally, strategically and culturally. First, on the operational front. We set clear objectives at the beginning of the fiscal year and executed against them perfectly. I will let Lloyd take you through these, but at a high level, we focused on high-quality delivery to clients, hiring and retaining talent, stronger execution against the backlog, spending discipline and the successful capture of opportunities in a competitive market.

Secondly, on the strategic front. We further built and scaled across our business advanced capabilities in data science, digital solutions, cyber and engineering. And we also more tightly integrated those capabilities with the consulting and mission expertise that are at the core of our brand.

Fiscal year 2017 was the fourth year of implementing our blueprint for growth, a strategy we call Vision 2020. It was designed to, and in fact does, position Booz Allen for the future by moving us closer to the center of our clients' missions, increasing the technical content of our work, attracting and retaining talent in diverse areas of expertise, harnessing innovation from inside and outside the firm and expanding into the global commercial market. Our continued commitment to the principles of Vision 2020 positions us well for expanding growth, profitability and a stronger balance sheet in the near and medium term.

I noted a moment ago that a further area of progress exists. We subscribe to Peter Drucker's view that culture eats strategy for lunch. And so we focused last year on reenergizing our culture by rearticulating our purpose and our values as an institution. It is hard to quantify but impossible to overstate the energy and enthusiasm that has been created by this work. I'll return to this topic towards the end of the call, but first, let me let Lloyd take you through our financial results. Good morning, Lloyd, over to you.

Good morning, Horacio, and good morning, everyone. I'd like to start by thanking the people of Booz Allen. It has been a year now since I transitioned into the role of Chief Financial Officer, and a big focus for me, with the support from market and factional leaders across the firm, has been operational consistency and discipline while achieving our financial goals. The results we are reporting today are the fruits of that labor, and I want to acknowledge right upfront the contributions of many, many people across our business who rolled up their sleeves, went to work and achieved the results that we aimed for a year ago. This is a firm that sets a plan and executes relentlessly. We have done that with our year-to-year performance and our long-term strategy for growth. Our latest results demonstrate the fundamental strength of our business and our management team. They are the product of our success operationally and strategically and sets us up for another year of accelerated growth for FY '18.

As Horacio pointed out, industry-leading revenue growth is an engine for sustainable shareholder value creation. We remain committed to generating near- and long-term shareholder value through revenue growth, operational excellence, and effective capital deployment. We recognize that the strength of our balance sheet, our business performance and cash generation are meaningful value-creation tools. I'll talk more about that when we get to guidance. First, let's start with the specifics of our FY '17 full year results. You'll find them on Slide 5.

Revenue increased 7.4% compared to fiscal year 2016. That's a great number, and it's driven by client demand. Throughout the year, we efficiently deployed our people onto contracts and delivered high-quality service and solutions to clients. The revenue growth exceeded our expectations because of strong direct labor generation in the fourth quarter, along with continued high billable expenses. I want to call your attention to another top line number, the metric we pay special attention to inside the business because it's where most of our profitability is generated. That metric is revenue excluding billable expenses, which is essentially the revenue from our own people and solutions.

For the year, revenue ex billables grew 4.1%. That's compared to less than 1% growth in FY '16. The strength of that number in fiscal 2017 shows the positive impact of our growing headcount and improved productivity. And given its importance to our overall financial performance, increasing our revenue excluding billable expenses and at even a faster rate is the objective Booz Allen is driving to in FY '18.

During the past fiscal year, we added more than 700 professionals to Booz Allen's ranks. That's meaningful growth after 5 years of declining or flat headcount. The increase resulted from both the Aquilent acquisition and the innovative approaches we have implemented to recruit, hire, develop and retain highly sought-after talent. We are in an extremely competitive labor market, and we are more than holding our own. Our efforts on this front have carried right into FY '18, and we intend to maintain our momentum.

Turning our attention to backlog and book-to-bill. Of course, we need an aggressive recruiting and hiring posture because of our continued success in capturing opportunities and building backlog. During FY '17, Booz Allen increased to 90% of our win rate on recompetes, and we sustained our 62% win rate on new contracts. Our backlog hit a high water mark at the end of the second quarter, and we ended the year near that record at $13.6 billion in total backlog, a 15% year-over-year increase. Growth is found in all categories: 5% for funded backlog, 22% for unfunded, and 16% for priced options. Book-to-bill for the year was a very healthy 1.31x boosted by our strongest fourth quarter book-to-bill since the IPO, 1.04.

Moving to the bottom line. I'm pleased to report strong results for the year. Operating income and adjusted operating income were up 8.9% and 9.6%, respectively, due primarily to revenue growth and the positive impact of lower indirect spending. When compared to FY '16, adjusted net income increased 6.5% to $262 million, and net income decreased 14.2% to $252 million. Net income had benefited in FY '16 from a nonrecurring release of certain income tax reserves totaling $53 million.

Adjusted EBITDA grew 8.1% compared with the prior year, to $547 million. And adjusted EBITDA margin was 9.4%, on par with FY '16. The result reflects the increase in billable expenses as a percentage of revenue compared to the prior year. ADEPS for the year was $1.75, exceeding by $0.01 the top of our revised guidance range due to our strong fourth quarter performance.

Another indicator of the fundamental strength of our business is the improvement we saw in our cash position during FY '16 -- '17. The change is due to revenue growth, spending discipline and cash tax savings. Cash from operations was 53% higher in fiscal 2017 than in the previous year, and capital expenditures were $54 million, slightly below our latest projection. As a result, our free cash flow to adjusted net income ratio was 1.25.

Turning to the balance sheet for a moment. As you know, in recent weeks, we took 2 steps to fix interest rates on a portion of our debt. I'm now on Slide 6. We executed swap agreements and completed Booz Allen's first bond offering. Both provide insulation for the firm in a rising interest rate environment, a goal we indicated we were working toward on our last call with you. The $300 million forward starting swap fixes LIBOR at 1.998%, with an effective date of April 30, 2018, and a maturity date of June 30, 2021. The planned use of the proceeds from the $350 million bond offering are the Aquilent acquisition, working capital needs and other general corporate purposes, including eventual repayment of the outstanding deferred payment obligation connected to the 2008 Carlyle transaction. The offering was priced at 5.125% due in 2025. The very great rate -- the very good rate we locked in as a first-time issuer shows bondholders' confidence in Booz Allen as a quality investment. The swaps and bond offering following the repricing of our Term Loan B in February would reduce our interest rate spread by 50 basis points. Taken together, the swaps and bond offering fix interest rates on about 35% of our debt. And based on our current analysis, we will be comfortable raising that to about 50% of our debt. We're also comfortable being at or slightly above our current leverage ratio given the macroeconomic environment and the strength of our balance sheet and operating performance. That said, we would consider increasing leverage if needed primarily in response to the right acquisition opportunity.

Given our continued strong financial performance and our confidence in the future, the company announced today that it has authorized a regular dividend of $0.17 per share payable on June 30 to stockholders of record on June 10. Over the course of fiscal year 2017, Booz Allen returned about $149 million to shareholders in the form of dividends and share repurchases. We bought back a total of 1.6 million shares during the year and at the end of the fiscal year had $255 million remaining under our current repurchase authorization. Total shareholder return for the year was just over 19%.

Finally, I want to talk about how we're thinking about the future, which provides context for our fiscal year 2018 guidance. Our objective in FY '17 was accelerating organic revenue growth. Over the next few years, we intend to maintain acceleration at the revenue ex billables line and to grow EBITDA at the same pace. During this period of continued growth, we expect stable to slightly improving EBITDA margins in the mid-9s. Margin expansion over the long term will be made possible by operational efficiency, continued strong growth in our global commercial business and by shifting more of our portfolios to high-margin work that integrates analytics, cyber, digital and engineering solutions with our consulting expertise. Demand for our work remains healthy, and our pipeline is robust with total proposal value and durations of contracts and task orders and submitted proposals holding steady. We are, of course, very pleased that Congress passed funding through the end of the government's current fiscal year. This removes for now the specter of a possible government shutdown and provides agency leaders with the certainty they need to effectively execute their missions. We expect a strong first half in FY '18 relative to the prior year. This is due both to the certainty of government funding and the greater operational discipline we have implemented since a year ago.

Beyond September 30, there is some uncertainty, as you know, because of ongoing work in Congress on a whole host of policy and budget issues. But leaders across our business have been carefully tracking the new administration's priorities, and they are staying close to clients so that we can anticipate their needs and position ourselves well. We are confident that the advanced capabilities we have invested in, in particular the integration of them with each other and our consulting expertise will remain in high demand across our client base into the future even as Congress and the administration adopt new budgets, policies and priorities.

With accelerating growth at the revenue ex billable line and stable to slightly improving margins, we anticipate continued strong cash generation and expanding balance sheet capacity. This will provide opportunities to create near- and long-term shareholder value through the smart use of our balance sheet, including capability-based acquisitions, share repurchases and dividends. The actions we have taken to adjust our capital structure support our strategy to retain flexibility in how we deploy capital depending on general economic conditions, availability of options for support and growth and value creation and the strength of our balance sheet. We are mindful of our obligations to all investors, including our debt investors and have set a goal of deploying at least 100% of free cash flow to support acquisitions, share repurchases and/or incremental dividend as opportunities warrant.

With all of that as context, I'll review our projected numbers for fiscal year 2018, which are on Slide 7. Our top line guidance is for revenue to increase 4% to 7%. At the bottom line, we expect diluted earnings per share to be $1.76 to $1.86 and adjusted diluted earnings per share to be $1.79 to $1.89. Capital expenditures in FY '18 are projected to be $60 million to $70 million, and we expect to convert about 100% of adjusted net income to free cash flow.

I'll conclude there, Curt. Let's move to Q&A.

Great. Thank you, Lloyd, and thank you, Horacio. Nichole, at this point, can you provide instructions for Q&A?

(Operator Instructions) Our first question comes from the line of Ed Caso with Wells Fargo.

When we were at the Pentagon last week, they said much of the ability to get awards done was not being impacted by the lack of political appointees except for maybe some of the really big deals, I guess. Is that what you're seeing? And how much of your work is not dependent on the hole in the political appointee factor?

Sure. Horacio, do you want to start?

Sure, I'll start. We are seeing a robust environment at this moment. The fact that there is a budget passed instead of a continuing resolution, as Lloyd pointed out, gives our clients some certainty, and as you know, a lot of our work happens inside of the structural government below the political appointee level. So we are seeing a good market and taking advantage of it.

And the only thing I would add is our pipeline is very robust. 15% total backlog growth, strongest fourth quarter since our IPO, I think, really based upon how close we are to our clients. We're also seeing our clients more adept at managing through budget turbulence. The omnibus spending bill just approved provides certainty through September, and I think a combination of all of that has us very optimistic about the opportunities in the market and what our clients want to get done as it's tied to their missions.

Another question is on organic growth. How much of that 4% to 7% is organic?

We are saying that all of it is within organic. We have had a very strong year in FY '17, largely dependent upon our ability to capitalize on the investments we made in the past; also, our ability to bring on the talent to convert our backlog. And so as we look into FY '18, we feel very confident that we will be within that range largely on an organic basis.

But does the Aquilent acquisition add about 1 point to that growth rate?

Yes.

Our next question comes from the line of Tim McHugh of William Blair.

I guess, I just want to ask, obviously, you talked about a lot of the long-term things you've been doing in the contract awards. But I guess, the conversion of that into revenue really seemed to accelerate this quarter. Can you elaborate a bit more, I guess, was it really just the hiring that finally kicked in? Were there any other, I guess, changes in the behavior or the market that kind of accelerated the growth rate as you got into the fourth quarter?

Tim, I think it was a variety of factors. Certainly, hiring the talent that we need to convert the backlog was one contribution. I think our confidence that our clients are experiencing regarding budget certainty as well as the need to get on with executing on their missions was another. Thirdly, I think as we have brought on the talent we need, we're also utilizing that talent at a very high level. And so a combination of factors kicked in really over the course of the year, pronounced in the fourth quarter, but we see that momentum continuing into FY '18.

Okay. And then just the billable expenses, how are you thinking about that for 2018?

Really in a range of 29% to 31%. We had thought that they would come down over the course of this fiscal year, but they did not largely due to the small business set-asides that the government is requiring as well as equipment purchases that -- tied to several of our contracts were elevated over the course of the year. And so looking at FY '18, we really see it again falling between 29% and 31%.

Our next question is from the line of Jon Raviv of Citi.

On that margin question, what are some of the other drivers in FY '18? Favorable mix from a fixed price versus cost plus suggests that you would have higher margins, commercial growth suggests higher margins, and also, I'd assume that accelerating net sales growth would suggest some expansion, but the guidance in your commentary suggests perhaps flattish. So can you talk about some of the other potential headwinds in the next year?

Sure. I mean, we still feel that to -- both in the near term as well as in the longer term, targeting stable to slightly improving margins in the mid-9s is going to allow us to achieve our objective of growth, which is important to us at both the top and the bottom line. The stability in the margins is fuel for growth that allows us to generate cash and then also create near-term shareholder value. Certainly, as you allude to, the mix shift of our work, contract mix, higher-margin solution work and global commercial penetration is going to allow us to expand on the margins. But that's the direction that we're headed in. Beyond that, we don't see the headwinds being different in FY '18 than what we've experienced in FY '17. So we're optimistic that we'll be able to have stable margins and the opportunity to expand upon them.

Got it. And then just a follow-up on that point. Is there some sort of time line one would -- we should expect one -- you might get slightly improving margins? Or could that happen as early as next year? I think in the past, Lloyd, you've talked about the notion of getting to more balanced growth, I suppose. So right now, you're accelerating. At what point do we maybe not accelerate as much and maybe see some more margin expansion?

Over the next couple of years, we see the opportunity to expand on the margins. And again, given my opening comments about revenue ex billables, that's the metric that when we say acceleration, we're really trying to accelerate. A year ago, we were at less than 1%. This year, 4.1%. And going into the future, we want to accelerate on that. We believe that, again, the mix shift looking and seeking and developing higher-margin solutions work is really going to help us to expand over the next year -- 2 years.

Our next question comes from the line of the Brian Ruttenbur of Drexel Hamilton.

Couple questions. First of all, on the balance sheet. What are your plans moving forward? Or do you expect anymore refinancing? And maybe just talk about that plan for paying down debt. So that's number one. And then number two, I want to understand your guidance for '18, if you calculate in there a CR for 90 days, and that's just an assumed risk in this business these days, or if you assume something different, a passage of budget on time, if you can address both of these.

Sure. To your first question, we're comfortable being at or slightly above our current leverage ratio given the current macroeconomic environment and the strength of our balance sheet and operating performance. That said, we would consider increasing, as I said earlier, if needed, up to 3.5 -- which is really, primarily, a response to the right acquisition opportunity. We are watching the markets. We're watching the Fed as closely as anyone, and as things change, we will adjust accordingly. But today, we're very comfortable with our net debt-to-EBITDA ratio. As it relates to the forecast and the potential for CR, our forecast is for the entirety of the year and, as I mentioned, we feel very strong that the first half of the year, because of the approval of the omnibus, is looking very strong. Beyond that, there is some uncertainty, and we have taken that into account as we put out the range of 4% to 7%. So from a forecasting standpoint, we've looked at our market, our clients and every dimension and feel confident that we've captured those uncertainties in our range.

Okay. And then just one quick follow-up on hiring of talent. You said that you've had to pay up. Can you talk a little bit about the cost increase that you've seen out there maybe in the last 90 to 120 days? Has there been a dramatic increase on a year-over-year basis? If you can give us something substantial to point to -- it's up 3% or something along those lines.

I don't think -- it's Horacio. I don't think we talked about an increased cost of talent. We're in a competitive market. We have the ability to attract and retain who we believe are the best people, the most skilled, and the most mission-focused people in the industry. I think our ability to both do that and work through putting them on our contracts is good and has been really successful. We are innovating both on the ways we attract and we bring people in. And we're feeling good about where we stand on that. I think 700 additional people for the year is the number that Lloyd quoted, which is again -- points to the opportunity to grow and positions us well to think about that coming into the new fiscal. So that's our general sense on talent.

I would just add that with some of the capabilities that we are -- have been successful in onboarding, even with expectations compensation wise for something commensurate with their skills we still feel good about, and our performance has indicated onboarding 700 folks with those skills with maybe an elevated compensation expectation, we're able to utilize them very quickly. And our clients are rewarding us with that. And so we expect that to continue in FY '18.

Our next question comes from the line of Ron Epstein of Bank of America.

Can you say or give us a feel for any way what agencies, departments in the governments are going to be driving the growth going forward?

As we look at the market, it's actually pretty broad-based. Every year, we define a plan. Every year, some parts of our business do a little bit better than planned, some parts of the business struggle to make their number, and overall, the portfolio responds at or above plan. And we see this year as similar. There's some turbulence in some of the agencies as new leadership comes in place and the priorities are sorted out, but we see broad-based opportunity across all of our markets. And again, I mean, when you look at our backlog, it's broad-based growth. When you look at the proposal pipeline, it's broad-based. We -- as you know, we focus more on having the right capabilities and being very agile and being able to shift people quickly to where opportunities present themselves. So overall, I would say, it's pretty good across the board.

Okay. And then maybe as a follow-on on some of the commentary where you guys spoke about going forward, there might be an opportunity for some higher margins. In your business, I guess, I have trouble understanding how you would actually achieve that. I mean, is it the analytics you mentioned that could potentially bring higher margins? You're not a manufacturing business, right? So when I look at it, it seems like your entire business structure is variable cost. Where are you going to get the leverage where you can actually get higher margins?

Sure. There are -- the way we see it is there are 3 forms of mix shift. The first is contract type. Fixed-price contracts tend to have a higher margin to them because of the risks associated, then cost plus or time and materials. So as our portfolio -- I think if you look at the numbers, we've seen a 2% increase in the amount of fixed-price contracts we have. We see the potential to build our margins there. Number two is the type of markets that we have in our portfolio. We see a 2.5 to 3x improvement with our global commercial margins compared to federal. And so as that business -- although a small part of our overall portfolio today, as that business continues to grow, we would expect higher margins to result. And then lastly, as Horacio has mentioned, we're in the fourth year of investing in what we believe are capabilities the federal sector is going to have high demand for. And what we have seen is that the nature of that work also generates higher margin -- a higher margin than pure program management type of support. So as we continue to pursue those 3 forms of mix shift, we're expecting a higher margin result to occur.

Our next question comes from the line of Cai Von Rumohr of Cowen & Company.

So Lloyd, your fourth quarter revenues ex billables, up 9%, I guess, up 8% if we take out the acquisition, is a huge step-up from Q3. And really, as we look at your guide for '18, it kind of implies a deceleration from that rate. Help us understand why you were quite so strong in this quarter and kind of how that rolls into fiscal '18 sort of with some color on the quarterly pattern.

Sure. There are a couple of things that contributed to the fourth quarter. One was our ability to attract the talent that I've been referencing this morning. And so we saw quite a bit of a pickup in direct labor, and also, our billability remained very solid on those new adds. Our indirect spending was also down. We had put in place some controls over the course of the year, both on allowable and unallowable dimensions, and the team really did a great job managing the indirect spending. Thirdly, we saw additional revenue come in, in the fourth quarter. Some of our international work contributed to that. And then we had the Aquilent acquisition. So as we forecast into '18, there are a couple of those items, namely we've integrated Aquilent, we will maintain our tight control on spending. Billable expenses is a bit of a variable. We, again, believe it will be between 29% and 30%, but I am careful not to expect it to trail off. And I think the combination of all those factors keeps us confident that we'll end up in the range of 4% to 7%, but also recognizes that there's a variable or 2 in there that might control us being out of the gate at the top end of the range.

Cai, as you know, we manage the business for the full year, and so in any given quarter, you're going to see small perturbations up or down that are driven by -- some -- what happened that quarter but also happened the quarter a year ago, that's the winter quarter. You can get a couple more snow days, will change the number. So I think that when you look at the totality of the year and you look at the 4% and you look at acceleration from that number, that's what we're focused on. I think Lloyd talked about the fact that the first half feels very solid with the budget in place. The second half, we're going to have to see the budget situation as it evolves. So you put it all together and the 4% to 7% for the year is what we're focused on more than the actual quarterly result. But we feel that, that combined with our targeting margins in the mid-9s, combined with strong both cash generation and cash deployment creates great opportunities for shareholder value creation in the near term as we continue to accelerate towards the long term.

One quick follow-on. If you look at your mix, Intel was down for a couple of years through '16. You had strong growth in commercial/international. Help us understand going forward what are the key end-market drivers? Should we still look for commercial/international to grow faster? And is Intel starting to grow?

Commercial/international is going to grow -- continue to grow fast. We are confident about that. That's shown double-digit growth for a while. We expect that to continue. And as I said before, as we look across the portfolio, we see broad-based opportunity across really all major parts of the federal market with -- and it will vary throughout the year. And as you know, the reason we don't try and give guidance for the different piece parts is because we want to be agile and have the ability to fully respond and capture both opportunities financially but also opportunities to do great work for clients as that presents itself, and that's really more of our focus.

Our next question comes from the line of Rayna Kumar of Evercore.

Can you quantify pricing trends in the fourth quarter and your expectations for pricing in FY '18?

We are seeing pricing not as significant an issue as it has been in the most recent past. More and more government award decisions are occurring on a value -- a best value basis. And so we are seeing an abatement in the pricing dynamic that we had been encountering over the past 3, 4 years.

Thank you. And you just mentioned some additional revenue from international work in the fourth quarter. Is that work that you expect will repeat in FY '18? Or should we think of that as more of a one time?

No, it is part of a longer-term contract and client relationship that we have. So I would characterize the nature of that relationship was getting going in FY '17. Now that we are more than off to the races, we expect that to continue into FY '18.

Our next question comes from the line of Krishna Sinha of Vertical Research.

So looking at your net revenues, so ex billable expenses, I think Cai mentioned it was up, I think, 9.2% in the quarter. As you guys integrate more commercial work or pursue more commercial work, you've mentioned it's 2.5 to 3x more margin. How do we think about how billable expenses will trend? So I guess, my question is are there less billable expenses tied to commercial work, and therefore, you can keep billable expenses flat and yet grow margins if you pursue more commercial work?

Sure. I don't want to sound like absolute. There are some billable expenses, but it's such a small percent on the commercial/international that it's not really as significant a factor it is with the federal work that we conduct in our portfolio. So said another way, more of that revenue drops to the bottom line so we're -- then we're able to generate a higher-margin type of performance with that part of the portfolio.

Is it the same dynamic with international work?

Yes. So I mean, there is, again, a small -- very small percentage tied to the international work. But what we are experiencing in many ways is more analogous to commercial, whether it's the public sector or true commercial in nature. So again, what we're seeing in our global commercial business, the international component included, is a higher margin performance than what we would see in the U.S. federal market.

And then on G&A expense. I know your book-to-bill has been strong on a trailing 12-month basis. G&A kind of ticked up a little bit in the fourth quarter. How much of that was bid and proposal expense? And what are you guys predicting for bid and proposal expense going forward?

Very little, if any, was really due to bid and proposal expense. So we're not seeing an uptick in G&A going forward.

Our next question comes from the line of Rob Spingarn of Credit Suisse.

Two things. Wanted to go first back to the question on best value versus LPTA. Are you clearly finding that Booz is heading more in the best value direction? Do you think there's a bifurcation? Are the LPTA guys settling for more LPTA work and you guys and your direct peers more best value? Are we bifurcating here where some people are just going to get lower in margin and the others are going to go higher? That's the first question. And then I have a question as well on the backlog.

Let me take the first question and then Lloyd can tell you all things backlog. Our thesis, and as people talked about it on these calls over the years, is that the market is indeed bifurcating, and there's an opportunity to define a differentiated market presence around work that is center to the mission that has a high differentiated component around the technical work. For us, it's integrated closely with our consulting and mission focus. And so that's the environment where we play. Over time, we expect more of that portfolio, therefore, to trend towards best value whereas other elements, other services will tend more towards LPTA. As you know, this is not a bureau thing because the government often buys in bundles. But I think, we view that as the general trend, and we have, on that strategy, done the things that we've done, invested in where we've invested, made the acquisitions that we've made and so forth. So that's really, I think that you've called what we've been seeing and what we've been believing for quite some time.

Okay. And then on the backlog side and maybe there's a margin element to this question. But there seems to be a lot of, call it, surprisingly large amounts of funding in the final 2017 omnibus for things like counter-ISIL training and equipment, which is $1.5 billion type number. You've got the European Reassurance Initiative, $3.5 billion growing to $5 billion in '18. How is Booz accessing this extra money? What kind of work is it relative to your answer to my prior question? And just overall, how are you accessing the extra $15 billion in the 2017 fundamental, of which half was O&M?

I guess, I'll start. Our approach to this is our general approach. We're working very closely with our clients to understand their priorities as they are evolving. We have a very broad-based presence across DoD. But I think your question is more related to DoD. I think this could be extended to the entire federal government. And we're working with each and every client to understand first their mission priorities and how those are evolving. And then from there, the budget expectations and where both money for them to accomplish mission and opportunity for us will flow. But it's in that sequence as we see it. And again, the combination of a very broad-based footprint and the agility to move resources very fast to where the opportunities present themselves and a quite a bit of contract ceiling across a very large number of contracts is what gives us the opportunity to continue to be the organic growth leader, as we've talked about before, and give us the opportunity that we're talking about, in general, in the market.

The only thing I would add is that when you look at the 3 categories of backlog that we have, we see a continued increase in the price option percentage, which, by our accounting, really is an indicator as to our clients' confidence level in wanting to engage us and continue the relationship going forward and their confidence level in the overall environment that we find ourselves in. So as we have seen that continue to grow, we are working, to Horacio's point, as closely as we can with our client, even closer to their missions, and as a result, we've seen a nice increase in our backlog, particularly in the priced options.

But most of what I was talking about, I guess, is future money. How well positioned are you for some of what I was talking about, that $5 billion, $6 billion or so, that's coming? And can that drive another backlog expansion to your -- in '18 much like '17?

We don't give guidance on backlog, but I think as you see our revenue guidance, we are obviously -- we feel we're well positioned against the budget that was passed against the opportunities that we're seeing in the market and against where our clients want us to go.

Thank you. And that's all the time we have for questions. I'd now like to turn the call back over to Mr. Horacio for any closing remarks.

Thank you very much, everyone, for your questions. As I close here today, I want to return for the reasons of our success in FY '17. In addition to the progress we made operationally and strategically and the numbers that accompany it, which we were the vast conversation of this call. Booz Allen's culture actually played a crucial role. It's always been the fundamental driver of our performance as a firm, and actually, as an investment as well. Those of you who are familiar with our story know that we prosecute the market differently, and we operate with a unique business model that grants us both speed and agility. Our clients often remark that people are fully committed to their success, and that sets them apart, and it's beyond the simple execution of a contract. It's sometimes hard to explain how we do it, but the consistency of our performance says that there's something unique in who we are. So this past year, we took the time to put those intangibles into words so they can continue to propel us as our size, market presence and diversity of portfolio expand. I'm proud to share with you a brief synthesis. Put simply, Booz Allen's purpose is to empower people to change the world. And I think that perfectly captures the motivation and mission focus of our people. Our firm's values, our ferocious integrity, passionate service, collective ingenuity, unflinching courage and a champion's heart, and they are much more than words. They set the standards and demand action. They involve things like speaking truth to power, harnessing the power of diversity and finding problems and solving them. These words matter tremendously to the people of Booz Allen. The journey to write them down over the past year has created connection, unity and energy. And they matter to our clients, because they speak of the ethics and integrity that ground the virtuous cycle I described before. So for those reasons, we also believe they matter to our investors. Our purpose and our values command Booz Allen to never stand still, never be satisfied, never cut corners and never settle. And whether it's to retain the best people, to solve the toughest problems or to drive above-market TSR, we are committed to simply being the best. We have a great record of doing so and intend to do even better going forward. So once again, thanks for joining us on the call. We wish you a great start to the summer, and have a great day.

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