Booz Allen - Q4 2023

Transcript

Operator (participant)

Good morning! Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering fourth quarter fiscal year 2023 results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I'd now like to turn the call over to Mr. Nathan Rutledge.

Nathan Rutledge (Principal and Head of Investor Relations)

Thank you. Good morning, and thank you for joining us for Booz Allen's fourth quarter and full fiscal year 2023 earnings call. We hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on slide two. With me today to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer, and Matt Calderone, our Executive Vice President and Chief Financial Officer. As shown in the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning are forward-looking and may relate to future events or future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call.

All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. 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 fourth quarter and full fiscal year 2023 earnings release and slides. It is now my pleasure to turn the call over to our CEO and President, Horacio Rozanski. We are now on slide 4.

Horacio Rozanski (President and CEO)

Thank you, Nathan. Good morning, everyone. Thank you for joining the call. Matt and I are pleased to share excellent financial results for fiscal year 2023. Every day, the people of Booz Allen bring their best to our clients' most critical missions. Their hard work and dedication continue to produce outstanding outcomes. Over the past year, we have strengthened our momentum and continued to deliver industry-leading organic revenue growth. Today, Matt and I will discuss the full year results and our fiscal year 2024 guidance in the context of our investment thesis. I will also share an update on the leadership dimension of our bold growth strategy and describe our priorities for the year ahead. Let's begin with fiscal year 2023, another outstanding year for Booz Allen.

Our performance put us on track to deliver on our investment thesis, which we first discussed with analysts in October of 2021. Our investment thesis targets growing Adjusted EBITDA to $1.2 billion–$1.3 billion by fiscal year 2025. We expected to accomplish this goal through the following levers: industry-leading organic revenue growth in the range of 5%–8% annually, Adjusted EBITDA margins in the mid-tens, with continued investment for future growth, and $3.5 billion–$4.5 billion in total capital deployment that prioritizes small to mid-size strategic acquisitions. At this point, organic growth and profit are above our forecasted ranges. Inorganic contribution is somewhat behind pace. When put together, we are on track with excellent momentum and optionality as we move into our second year in the planning horizon.

Diving deeper into the full FY 2023 results, it is clear our leaders are doing an excellent job on hiring, selling, and the cost management priorities we outlined last May. Total revenue grew 10.7%, fueled by a record-setting 10.6% client staff headcount growth. Our total backlog grew 6.7% to $31.2 billion, bolstered by wins that insert leading-edge technology into priority mission areas. We are growing efficiently in a challenging inflationary environment and delivered $1.014 billion in adjusted EBITDA with an 11% adjusted EBITDA margin. We also completed the acquisition of EverWatch last October and began integrating it into our portfolio.

This morning, I also want to update you on our settlement discussions with the Department of Justice or DOJ, over its civil investigation into highly technical elements of our cost accounting and indirect cost-charging practices with the U.S. government over the period from 2011–2021. As a reminder, on May 12, 2021, the DOJ notified us that it had closed its criminal investigation with no further action. Regarding the civil matter, we are limited in what we can say as we are in active settlement discussions with the DOJ. We reserved an additional $226 million in the fourth quarter of fiscal year 2023. We also disclosed that the range of reasonably possible loss in connection with the investigation is between $350 million and $378 million, inclusive of the amount recorded in our financial statements....

Since we have always believed that we acted lawfully and responsibly, we would not admit any wrongdoing. Booz Allen cooperated with the DOJ inquiry since first learning about it nearly six years ago. If we do settle, we would avoid the delay, uncertainty, and expense of protracted litigation into an immensely complex cost accounting matter. Now let me shift to VoLT, our strategy to accelerate growth by rapidly bringing innovation to national priority missions. Having described the V and the T in prior earnings calls, today, I will discuss the L or leadership dimension of VoLT. In this context, leadership is about being first to build scale positions that solve challenges at the mission and technology intersection. It's leading by correctly anticipating the decisive moments that fundamentally transform missions and create extraordinary growth opportunities. Today, our nation is at a historic inflection point.

Instability in the geopolitical environment and the rapidly accelerating pace of technological change are converging. This creates complex, interconnected mission challenges. Two top priorities are the pacing threat of China and the rise of artificial intelligence or AI. As our country faces these realities, Booz Allen is prepared to lead in our industry and beyond. Let me begin with China. For over two decades, we have been expanding our presence in the Indo-Pacific region in support of defense and intelligence missions. Today, our team in Hawaii has grown to over 300 professionals, and our cutting-edge Honolulu office includes an innovation lab where we co-create solutions with clients. We have an additional 200 employees positioned across the entire INDOPACOM region. As our clients' priorities and resources increasingly shift to the Pacific, we are already establishing the geography and prepared to support our clients' growing efforts.

Given the strategic importance of the mission to counter China, earlier this year, our entire Booz Allen leadership team was on the ground in Hawaii. We engaged with senior defense clients and community leaders to discuss the full range of opportunity and need. I came away with a renewed sense of urgency to invest and position our best technology capabilities in the region. I see an opportunity to lead by rapidly providing our clients with scaled solutions that integrate multi-domain technology and critical infrastructure protection across all of our work. This connects to our leadership position on the second priority, artificial intelligence or AI, where we have been investing for years in anticipation of the historic disruption we are now seeing.

We are the largest single provider of AI services to the federal government. We were recently recognized by Frost & Sullivan as a growth and innovation leader in AI. Booz Allen has four primary differentiators that enable us to take trusted AI solutions from the lab to the mission at scale. First of all, our world-class talent. Our team of experienced AI, ML, and data practitioners is scaling to meet demand, growing by over 20% in fiscal year 2023. We're also training experts in adjacent disciplines to ensure AI is infused into all of our work. Second, our large and growing portfolio of contracts. This includes two of the largest AI contracts in the history of DoD. Beyond our AI-centered portfolio, many of our largest mission contracts have AI in scope.

For example, we are pleased to announce that we recently won the $919 million EDITS task order. Through this work, Booz Allen will insert new technologies to help enhance the capabilities available to the war fighter in all environments and combat situations. Third, our innovation engine. Our proprietary AI software factory, known as AI Assemble, offers reliable, reusable solutions that can be quickly tailored for the mission. More broadly, Booz Allen has been piloting and experimenting with generative AI for years, well ahead of it jumping into popular consciousness. Finally, a robust ecosystem of innovation partners provides access to the latest developments across the entire tech stack. AI has been a primary focus of our corporate venture fund, and we're pleased with the progress we are seeing. Our position as a leader is one of both insight and responsibility.

That is why we have been working for years on an ethical AI framework that quantifies risk and supports measurable, responsible AI models. Our recent investment in Credo AI augments our capability. Our nation is facing unprecedented threats and challenges. In this environment, we are proud to deliver AI innovation across all the missions we support, and we see significant opportunities ahead, especially as we look to integrate artificial intelligence with other key technology areas, such as our extensive cyber and digital transformation capabilities. Let's shift now to fiscal year 2024. I want to provide the strategic context for the detailed guidance Matt will outline later in this call. We have ongoing momentum entering fiscal year 2024. Our headcount growth, strong demand, and funding for client priorities enable acceleration into the first half of the fiscal year.

Conversely, we are planning for challenging external dynamics in the second half of the year. The ongoing debt-ceiling and budget negotiations create uncertainty for our clients. We recognize that a timely budget for the next government fiscal year is likely out of reach. This lack of clarity and volatility around funding can often delay decision-making and contract awards. Therefore, our fiscal year 2024 guidance reflects both our incoming momentum and a range of funding scenarios for the next budget cycle. When taken together, we expect adjusted EBITDA between $1.075 billion and $1.105 billion, supported by strong revenue growth between 7% and 11%. This guidance sustains our commitment to deliver on our FY 2025 investment thesis goals. Matt will cover both our results and guidance in much more depth.

Before handing off to Matt, I'd like to describe four priorities for the year ahead. These support achieving our multi-year financial objectives and align to those factors we can control. First, we must focus on aggressively capturing and starting work before September 30. This is particularly important in our intelligence accounts, where we are seeing higher than anticipated contract turnover. Second, we must continue to run our business tightly, evolving our operating model to support fast growth and create capacity for continued investment. Third, we will continue implementing Vault, looking for opportunities to accelerate our growth in new or evolving priority areas such as space and climate. Fourth, we remain committed to deploying capital in a way that maximizes shareholder value. Our focus remains small to mid-size acquisitions as a strategic accelerator to our Vault objectives.

In closing, as we begin fiscal year 2024, I am very proud of everything our people accomplished in this past year. Booz Allen is nearing 32,000 professionals who bring their all in support of our clients and our institution. It is through their passion and talent that we continue to deliver industry-leading organic growth and have strong momentum strategically and operationally. The challenges facing our nation are immense, and Booz Allen's purpose and values inspire and drive us to innovate and find solutions. This gives me optimism about the future. I am confident in what we can do to help lead the way to a better tomorrow. Now, Matt, over to you to take us through the full financial results.

Matt Calderone (EVP and CFO)

Thank you, Horacio. Good morning, everyone. I, too, am very pleased with our operating and financial results. We had a strong fourth quarter, closing out an excellent fiscal year 2023 at both the top and the bottom lines. The momentum we built on both the supply side and the demand side positions us well for the future, as you will see in our fiscal year 2024 guidance. Booz Allen continues to produce industry-leading organic growth. Our margins are underpinned by the quality of our offerings and the strength of our execution. As a result, we remain on track to deliver on our multi-year investment thesis.

I have a lot to cover today, I will start by hitting the highlights of our fourth quarter performance, then turn to our fiscal year 2023 results, and finally close with our fiscal year 2024 guidance. Our fourth quarter results were in line with our expectations as we finished the fiscal year strong, while investing in the talent and the capabilities to drive future growth. In the fourth quarter, we delivered overall revenue growth of 8.7% year-over-year, and organic revenue growth of 7.7%. This performance was driven by continued headcount growth, a solid book-to-bill ratio of 1.47 times, and client staff utilization that declined in the fourth quarter but is in line with our current growth posture.

Adjusted EBITDA for the quarter grew to $231 million, an increase of 13% year-over-year. This was a function of our overall growth, strong contract level performance, and continued efforts to operate more efficiently. This translated to us generating $1.01 in ADEPS for the quarter, a growth of 17% year-over-year. In the quarter, we returned $191 million of capital to investors, primarily through a combination of dividends and share repurchases. Finally, we added over 800 net client staff in the quarter, a Q4 record, due to strong hiring and seasonally low attrition. Now, please turn to slide 6 as I discuss our full fiscal year 2023 results.

Total revenue for fiscal year 2023 grew 10.7% year-over-year to approximately $9.3 billion, exceeding the top end of our guidance. Organic revenue growth was 9% year-over-year, and revenue excluding billable expenses grew 9.5% to approximately $6.5 billion. Our growth in fiscal year 2023 was broad-based. In defense, revenue grew approximately 7% year-over-year. We are expanding our work at the core of national defense priorities, leveraging emerging technologies, such as those Horacio described, to transform missions and provide our warfighters with decision advantage. Hiring remains a focus for our defense leaders, as their success to date has allowed us to ramp up new work and convert backlog. This business continues to accelerate. In civil, revenue grew by approximately 19% year-over-year.

This growth was particularly strong in our health and citizen services accounts and across our cyber and digital services offerings. We continue to see growth in our civil markets with a healthy proposal pipeline and the talent needed to convert on existing backlog. In intelligence, revenue grew by approximately 7% year-over-year. This business delivered flat revenue growth in the 4th quarter due to tough year-over-year comps in billable expenses and cost recovery on certain contracts. We expect modest growth in the 1st quarter of fiscal year 2024, this will taper during the year as our intelligence business has seen higher than anticipated contract turnover. Our intel market leaders are focused on realizing the full value of the EverWatch transaction and repositioning our work against critical defense intelligence, national intelligence, and cyber missions. Finally, our global commercial revenue increased approximately 6% year-over-year.

Our work providing critical cyber and incident response services to commercial clients and its connection to our government cyber mission remains a small but strategically important part of our overall portfolio. On the labor supply side, we ended the fiscal year with approximately 29,000 client staff, an increase of 10.6% year-over-year. Total headcount, inclusive of corporate staff, increased only 8.9%, reflecting our ongoing focus on managing the business more efficiently. We continue to see both hiring momentum and significantly lower attrition rates compared to prior years. On the demand side, our strong backlog of work and a robust proposal pipeline provide good near-term visibility. We ended fiscal year 2023 with a trailing twelve-month book-to-bill ratio of 1.18 times. Our total backlog was $31.2 billion, up approximately 6.7% year-over-year.

Funded backlog grew 24.5% to $4.6 billion. Unfunded backlog fell 4.1% to $9.5 billion, and priced options grew 9.3% to $17.1 billion. Looking forward, our qualified pipeline of $46 billion is up approximately 14% compared to this time last year. With the current year budget in place, we are leaning into this pipeline to win as much work as possible and to get it on contract in advance of the coming budget negotiations. At the bottom line, we earned $1.014 billion in adjusted EBITDA in fiscal year 2023, finishing at the high end of our guidance range. This is a year-over-year increase of 8.4%. Our adjusted EBITDA margin of 11% was in line with our expectations and our guided range.

Our net income decreased 41.9% year-over-year to $271 million. This was primarily a result of the $350 million legal reserve we recorded in connection with the ongoing DOJ matter in fiscal year 2023. Adjusted net income, which excludes this reserve, was up approximately 6.5% year-over-year to $605 million. Diluted earnings per share decreased 41% year-over-year to $2.03, primarily as a result of the aforementioned legal reserve. Excluding this reserve, adjusted diluted earnings per share, or ADEPS, increased 8.3% year-over-year to $4.56. Turning now to the balance sheet. We ended fiscal year 2023 with a cash balance of $405 million and a $1 billion untapped revolver.

Free cash flow for the year was $527 million. This was the result of $603 million of cash generated from operating activities, net of $76 million of CapEx. Our operating cash flow reflects our strong operating performance, offset by higher cash taxes due to the impact of Section 174, higher interest and higher spending on growth-oriented investments in our people and our business. Our net debt at the end of the fiscal year was approximately $2.4 billion, and our net leverage ratio was approximately 2.4x adjusted EBITDA. Turning to Slide 8. In fiscal year 2023, we deployed approximately $905 million of capital in a measured and balanced manner.

This included approximately $440 million connected with the EverWatch acquisition, $236 million in cash dividends, and $224 million in share repurchases at an average price of $91.83 per share. We remain patient and disciplined in our capital deployment approach as we navigate macroeconomic conditions, budget uncertainty, and a challenging M&A environment. We remain focused on finding small to mid-sized tuck-in acquisitions that are consistent with our culture and VoLT strategy, act as accelerants to growth, and meet our financial parameters. Today, I am pleased to announce that our board has approved a quarterly dividend of $0.47 per share that will be payable on June 30 to stockholders of record as of June 15. Please turn now to Slide 9 for discussion of our fiscal year 2024 outlook.

As Horacio noted, we are entering into a period of uncertainty in our external environment. This is a familiar pattern for us. In recent years, we have typically guided to and planned for a strong first half and a more uncertain second half of our fiscal year. We are doing the same this year, as you will see reflected in our guidance and operating priorities. That said, we have significant momentum in our business on the demand side, on the supply side, and in our operations, and we are well positioned relative to long-term demand trends. This supports fiscal year 2024 growth and profit guidance above the organic targets in our current investment thesis. At the top line, we are guiding to revenue growth of 7%–11%, 6%–10% of which will be organic.

We expect to start the year at or above the top end of this range. Where we fall within this range for the fiscal year will depend on several factors, including the pace at which we can win work and get it on contract, the outcome of government funding and budgetary debates, and the timing and extent to which we add consulting headcount throughout the year. At this point, we are targeting 3%–5% growth for the full year, in line with historic patterns, but likely weighted toward the first half. We expect adjusted EBITDA margins in the high 10%–11% range. This translates to an adjusted EBITDA dollar range of between $1.075 billion and $1.105 billion, or approximately 6%–9% growth year-over-year.

We expect ADEPS of between $4.80 and $4.95 per share, or growth of approximately 5%-9% year-over-year. Lastly, we expect operating cash flow of between $500 million and $600 million, and free cash flow of between $400 million and $500 million. This assumes a CapEx spend of approximately $100 million, and this cash guidance reflects EBITDA growth offset by continued investments to grow our business, higher interest costs, and temporarily higher cash taxes. In closing, I want to recognize our Booz Allen team for their hard work, dedication to mission, and commitment to the firm.

It is through their efforts that we had an excellent finish to our fiscal year 2023, built momentum that supports continued outperformance in fiscal year 2024, are well positioned against the most pressing needs of our clients, and remain on track to achieve our multi-year investment thesis. With that, operator, let's open the line for questions.

Operator (participant)

Thank you. To ask a question, please press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bert Subin with Stifel. Your line is now open.

Bert Subin (Equity Research Analyst)

Hey, good morning, and thanks for the question.

Horacio Rozanski (President and CEO)

Morning, Bert.

Bert Subin (Equity Research Analyst)

Hi, Bert. Morning. Horacio, hiring has been, you know, really strong, and your results are reflecting that. You have a couple contract headwinds you alluded to as we think through FY 2024. How are you contemplating the potential risk of just trying to reallocate that labor? If the tighter budget backdrop does ultimately materialize, is the plan just to slow down hiring so that supply matches demand?

Horacio Rozanski (President and CEO)

Thank you for that question. I'll start. You know, to answer your specific question, I think you're asking the Focused Fox contract.

Bert Subin (Equity Research Analyst)

That's right.

Horacio Rozanski (President and CEO)

To give you some background there, the, that, the, our contract, now that the proposal, that the protest has been adjudicated, we can talk a little more about this. Our contract will end, on September 30. Roughly speaking, we have about 400 Booz Allen people on the contract. We expect to retain about half, about 200, and reallocate them to other mission priorities. We have a lot of important cyber work going on throughout the firm, that these folks would be tremendous for. That's so that's sort of the play on that. In the greater scheme, though, when you look at the business overall, the business is doing great.

I'm incredibly proud of where we ended last year with industry-leading organic revenue growth, with a lot of momentum, as you pointed out. There's momentum on both sides. I think on hiring and retaining, there's great momentum, but there's also a number of contract wins and things ramping up that make us feel like certainly over the next six months, the business is poised to perform very well. We are cognizant, as everybody else is, that the second half is going to be challenging from a budgetary standpoint. Our guidance for FY 2024 reflects that range. If you will, the lower end of the range speaks more to a more challenging environment. The upper end of the range speaks more to a second half that looks more like a first half.

You know, even if I get past that and I look at the investment thesis horizon and everything else, we're on track. VoLT is paying dividends we wanted it to pay, and it positions us well for the long term against topics like China, like AI, like 5G, cyber, quantum, I could keep going. You know, the business is in very good shape.

Bert Subin (Equity Research Analyst)

Horacio, maybe on the, you know, one of the latter points you had there, you know, Booz has been talking about AI for the last few years, and, you know, you gave a good update on your progress there. Now that there's been, I guess, a, you know, a more material inflection in AI-related demand just in the last few months, can you just walk us through what you've been seeing in your business, I guess, more recently, and how meaningful of a revenue driver you're planning for AI to be in your fiscal 24 guidance?

Horacio Rozanski (President and CEO)

you know, AI, as you pointed out, this is a topic that has been near and dear to my heart, given my own background, and something that we as a firm have been very focused on. We have a leading position, that's backstopped by a talent base that is very large and growing at around 20% per year. A contract base that has not just some really big AI contracts, but we're infusing AI into all of our major procurements to the extent that it makes sense, and it increasingly makes sense. More and more clients are interested in either having the option to imbue AI or asking for it directly, and so this becomes a differentiator, not just against our AI portfolio, but against our whole business.

We have some unique IC and IP in this area that we're very proud of. I talked about AI Assemble. There's a number of other things that we are doing. The partnerships that we've built and we continue to build also give us an edge in the market. You know, we have talked for years about the co-creation that we do with NVIDIA, around... and Cyber Precog. I spoke about that a couple of calls ago. We talk about the things we're doing with our corporate venture fund, finding small companies that have unique technologies. I really do believe that it's not just that we're a leader today in the federal space, but that we are poised to project that leadership more broadly, over time.

Bert Subin (Equity Research Analyst)

Thank you, Horacio.

Horacio Rozanski (President and CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.

Sheila Kahyaoglu (Managing Director, Equity Research)

Good morning, Horacio and Matt, and thank you so much. I wanted to expand upon the AI comment, Horacio, because I know you guys do so much there, and you just talked about it a little bit. Within the next five years, how do you envision the DoD or your civil customers implementing AI?

Horacio Rozanski (President and CEO)

You know, let me first say that my crystal ball is the same as everybody else's. I do believe that this is going to be a huge area of focus for all of our clients. If you break it down, first of all, the digital transformations that we're seeing that really affect our entire client base, especially our civil client base, are going to require more and more use of AI to accelerate everything from coding to verifying, to then managing these very large systems and very large, if you want, citizen interactions. You know, there's just so much that AI can do to both lower costs and improve the way in which citizens interact with the federal government at the civil level, and that is huge.

On the other side, on the national security side, I also believe that AI is going to increase the efficiency and reduce the decision cycle that our clients need to go through. Tying it to our other priority, this is very important as it relates to China, which of course, is also investing heavily in AI and the US, which still has to lead, has to continue to maintain this lead. Our clients understand that. Congressional leaders that I've spoken to understand that. Everyone is trying to figure out how to do this in a way that is both aggressive and sensible from the standpoint of being ethical and being very thoughtful about it. Again, we have both the brand, but most importantly, the capabilities and the people to be central to that conversation.

Sheila Kahyaoglu (Managing Director, Equity Research)

Great. Thank you. Sorry for putting you on the spot with that. Maybe, Matt, one for you.

Horacio Rozanski (President and CEO)

No, no, I appreciate it. This is a great question.

Sheila Kahyaoglu (Managing Director, Equity Research)

Matt, for you, when we think about the cash guidance, you know, operating cash flow guidance and about 70% free cash flow conversion versus 87% in 2023, what's sort of keeping you guys from getting to that 100% outside of Section 174?

Matt Calderone (EVP and CFO)

We said we're targeting free cash flow yield of approximately 100%, excluding Section 174. In 2023, we delivered 110%, which was great, and we are going to be below that in 2024 for a couple of reasons that we think are temporal. We are seeing an increase in working capital consistent with the rapidly growing business, particularly on the outlays side. Second, we talked about this last year, but there's some timing related issues related to some tax strategies we've been discussing. This year, we're going to have an incremental $50 million in cash taxes, but likely with no corresponding offset related to those tax strategies.

I will point you to an approximately $150 million receivable on our balance sheet, that we do anticipate receiving in future years. Obviously, you know, we, like everyone else, are experiencing higher interest expenses. I do expect us, Sheila, to be in a meaningfully better position, in FY 2025, as some of this is temporal.

Sheila Kahyaoglu (Managing Director, Equity Research)

Okay, great. Thank you.

Operator (participant)

Thank you.

Horacio Rozanski (President and CEO)

Thank you.

Matt Calderone (EVP and CFO)

Thank you.

Operator (participant)

Our next question comes from the line of Robert Spingarn with Melius Research. Your line is now open.

Robert Spingarn (Managing Director, Aerospace, Defense and Space Equity Research)

Hi, good morning, everyone.

Horacio Rozanski (President and CEO)

Hi, Robert.

Robert Spingarn (Managing Director, Aerospace, Defense and Space Equity Research)

Horacio, I wanted to ask, and perhaps this is for Matt as well, but as we think about all the budget discussions and the potential for growth to be at the lower end of some of the predictive ranges of late, just based on what we're seeing come across in real time on the, on the fiscal 2024 budget and what that might mean for holding growth. Beyond that, is there a concern perhaps that some industry players may try to compete a bit more aggressively on price in that kind of environment, and that margins just generally could come under pressure for the industry?

Horacio Rozanski (President and CEO)

You know, it's an interesting debate, and, you know, we've seen this before, right, in the 2011, 2012 timeframe. If we end up in a, you know, sort of more moderated budget environment in the next couple of years. And we've, again, from the standpoint of our 2024 guide, we have taken some of this historical turbulence into account as we think about the second half of our business. On your specific question, there's always price pressure in this industry. This is not new. As you know, we have migrated our business to the extent possible, to things that are at the center of our clients' mission, that require much more technical content, that require much more specialized IP and IC, that make use of these partnerships and create more differentiation.

We are always competing on price. Everybody else is, but I think we are in a somewhat less price-sensitive part of the market because of the uniqueness of what we do. At the same time, as I pointed out, Matt Calderone has pointed out in prior calls, we're also growing our business faster than we're growing our infrastructure and our back office, in order to create flexibility in our operating model to be able to manage, you know, through the cycle. You know, if I step back and I say, okay, we have an investment thesis of $1.2 billion-$1.3 billion of EBITDA by FY25, we're on track to deliver that, taking into account, again, a reasonable market projection.

Robert Spingarn (Managing Director, Aerospace, Defense and Space Equity Research)

Just as a follow-up to that, maybe in a similar vein, if defense is more protected in these budgets than some of the non-defense work, might you see the growth, both in revenues and EBITDA play out a little bit differently than in your internal plan? Meaning that civil perhaps becomes a bit of a bill payer across the government for defense, and so you grow the one business more than you might have expected at the expense of the other.

Horacio Rozanski (President and CEO)

I'll start, I think Matt has probably a lot to say on this topic, too. I'll point you to a couple of things. First of all, we have an operating model that allows us to shift resources quickly from one side to another. You know, we when we manage the business, we manage as an entity as opposed to as separate sectors on purpose, so that we can really go to where the opportunity is and shift leadership, resources, and investment quickly. That makes sense. I think that gives us some robustness, regardless of the shape of the budget going forward.

Then the other just minor point that I will make is if you think about our civil portfolio, we do have a significant amount of work, for example, with the VA and organizations that are likely to travel more with the defense portfolio than they will with sort of the more traditional civil accounts. It is hard to tell how all of that will play out. That's why, you know, we like to stay at the macro level and talk about the overall firm.

Matt Calderone (EVP and CFO)

Yeah, to build on that and reading between the lines, I think you're trying to get at it. Do we expect to see margin pressure? Clearly in our guidance this year, the answer to that is no. We're guiding to you from high 10s to the 11% range. Embedded in that, you know, we've anticipated that defense business is going to accelerate. I just want to double click on what Horacio said. We're operating the business very efficiently and I feel like we've got our hands on, you know, a lot of the levers with respect to labor economics, but also some of our corporate costs, and that just gives us a lot of optionality.

Bert Subin (Equity Research Analyst)

Makes sense. Thank you both.

Robert Spingarn (Managing Director, Aerospace, Defense and Space Equity Research)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Cai von Rumohr with Cowen and Company. Your line is now open.

Cai von Rumohr (Managing Director and Senior Research Analyst)

Hi. I think you're talking about Cai von Rumohr. You just recently announced EDITS, and you announced an IRS win. Were those wins actually made in the fourth quarter and announced now? Secondly, can you give us a little more color on Focused Fox, why you lost? Because that's an area in which you've been particularly strong, and the winner has not been as strong. Thanks so much.

Matt Calderone (EVP and CFO)

Yeah. Horacio, do you want to take Focused Fox first?

Horacio Rozanski (President and CEO)

Yeah, you know, Cai, on Focused Fox, I think you would have to ask the client more than us. In general, we have a very strong cyber business that is growing fast across the entire portfolio. This is one contract, and albeit, you know, a business that we wanted for a long time, it's a business that was migrating. The new contract is very different from the old one in terms of looking for lower skill sets. You know, therefore, it did not fully align with the type of work that we do and we like to do in the community. I guess that's the best explanation that I can give.

More broadly, though, we're seeing a lot of opportunity to deploy cyber resources across the portfolio. Our defense clients, with cyberspace, as now really an active warfighting domain, are more and more interested in making sure that they can get at scale, some unique capabilities. And our civilian clients, from a defensive posture, are also very interested in that from a law enforcement perspective, from a critical infrastructure protection perspective. As I look at our. You know, one of the things that we did, which we talked about in 2021, and I know you'll remember, is we built this National Cyber Platform where we allowed ourselves the opportunity to look horizontally across the entire cyber playing field, as opposed to being stovepipe, to minimize the national risk that exists in the seams of those stovepipes.

That strategy is proving to be very successful.

Matt Calderone (EVP and CFO)

Cai, the specific answer to your question about EDOS and EDITS is they were included in our Q4 book-to-bill.

Cai von Rumohr (Managing Director and Senior Research Analyst)

They were. Okay. The last one, you know, if in fact you see deceleration in Intel, isn't that a margin plus, a mix plus?

Matt Calderone (EVP and CFO)

On the margins, we're seeing acceleration in defense. The two will probably wash out.

Cai von Rumohr (Managing Director and Senior Research Analyst)

Excellent. Thank you so much.

Horacio Rozanski (President and CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Matthew Akers with Wells Fargo. Your line is now open.

Matthew Akers (Senior Equity Research Analyst, Aerospace & Defense)

Yeah. Hey, thanks, guys. Good morning. you know, Horacio, I think you mentioned in the opening remarks that, you know, the M&A portion of your long-term strategy is been a little bit slower than you would like. Can you talk a little bit more about what you're seeing there in terms of what assets are available? you know, I guess if that continues, you know, would you consider sort of other uses for the cash, maybe return to more shareholders?

Horacio Rozanski (President and CEO)

I'm going to let Matt start on this one, since he's got all the background.

Matt Calderone (EVP and CFO)

Thanks. You know, I think we're seeing an environment that is pretty consistent with what we've seen in the last couple of quarters, which is, you know, a lot of, you know, let's say, small to mid-size opportunities, but, you know, both buyers and sellers, that are being judicious in how they approach, you know, the M&A environment. We're actively engaged in a lot of processes. We've gone, you know, reasonably down, far down the path in a couple of these. You know, I think we said, I said, measured and balanced in the, in the script, just to sort of break it up from saying patient and disciplined, but we're going to remain patient and disciplined. You know, we've got industry-leading organic growth. We've got a strong balance sheet.

If you look at how we deployed capital in 2023 or even in Q4 of 2023, it was very balanced, and we're committed to deploying capital in a measured way to drive long-term shareholder value.

Matthew Akers (Senior Equity Research Analyst, Aerospace & Defense)

Got it. Thanks. If you could touch on, I guess, the margins. You know, so you're running a little bit of this, you know, sort of mid-10% long-term guidance that you gave. What are the biggest drivers there? Is it mix or, you know, billable expenses? You know, is there opportunity to maybe come in ahead of that longer term if you can continue the strength?

Matt Calderone (EVP and CFO)

Well, I think we've come in ahead of that the last couple of years, and we're guiding ahead of the mid-10% this year. Clearly, that's a reflection not just to the quality of the work we're selling and our contract execution, but how we're managing our cost base.

Horacio Rozanski (President and CEO)

I wanna just to amplify on that last point. You know, when we built our investment thesis, we were thinking mid-tens because we also wanted to make sure we had the capacity to invest in the business in the right way. The good news here is the acceleration of organic growth beyond, you know, what we originally predicted, opens that up a little bit. Then to Matt's last point, the fact that we're running the business so efficiently and so tightly, also creates room in our rates to invest in the business and position us for growth. That is giving us the opportunity to maintain margins above what we thought, while also accelerating the investments required so that the business does well, not just in 2024 and 2025, but really beyond.

Matthew Akers (Senior Equity Research Analyst, Aerospace & Defense)

Great. That's helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of David Strauss with Barclays. Your line is now open.

David Strauss (Managing Director, Equity Research – Aerospace & Defense)

Thanks. Good morning.

Horacio Rozanski (President and CEO)

Good morning.

David Strauss (Managing Director, Equity Research – Aerospace & Defense)

Matt, to follow up on the, on the cash flow question, could you just bridge us from the $603 million operating cash flow in 2023 to the $500 million–$600 million, I guess, between EBITDA, exactly what you're expecting for net working capital, R&D, you know, broader cash taxes, just help us, with that bridge?

Matt Calderone (EVP and CFO)

Yeah, I'm not going to give you much more than what I have to date. I've, you know, we'll look at getting out some more detailed guidance at in the appropriate forums. You know, essentially, the bridge is threefold, right? Higher interest, higher taxes with no corresponding offset this year, but we anticipate something in FY 2025 or beyond, and higher outlays consistent with, you know, the working capital required to fund a growing business where 30% of your work is done through subs.

David Strauss (Managing Director, Equity Research – Aerospace & Defense)

Okay. Then a question about 2025, the investment thesis target. You know, you did a little over $1 billion in EBITDA in 2023, forecasting close to $1.1 billion in 2024. Is $1.3 billion possible? You know, as we think about 2025, or is it much more likely closer to the bottom end? You know, if $1.3 billion is possible, how do you get there?

Horacio Rozanski (President and CEO)

You know, we're still on track to the 1.2–1.3. The business is doing extremely well. We're operating organically above our expectations, and as Matt pointed out, we are still very interested in strategic acceleration through M&A, if we can find the right assets at the right price. When you put all of that together, depending on timing and everything else, where we fall in the range, that'll be the guidance question a year from now. Right now, we are, you know, again, we recognize that the budgetary situation is challenging, that this creates uncertainty. We all read the papers this morning. There's still no deal on the debt-ceiling. I think all of that is real, and we're not ignoring it.

We believe that as a business, we are well positioned to have a very strong first half, to manage a reasonable set of outcomes in the second half, to deliver another year of organic revenue growth that leads the industry, and that hopefully positions us really well to have a strong 2025 as well. When you put it all together, we're, you know, we're working what we can control, and if I can just do a shout-out to the team, our team is doing an exceptional job of doing just that.

David Strauss (Managing Director, Equity Research – Aerospace & Defense)

Great. Thanks very much.

Operator (participant)

Thank you. Our next question comes from the line of Seth Seifman with JPMorgan. Your line is now open.

Seth Seifman (Vice President, Equity Research Analyst)

Hey, thanks very much, and good morning.

Horacio Rozanski (President and CEO)

Good morning.

Seth Seifman (Vice President, Equity Research Analyst)

wanted to follow up on the intelligence segment. Moving aside from just the Focused Fox contract, I think, you know, we've talked about that. Just as a percentage of sales, the intelligence portions, I think, down probably about 5 percentage points versus a few years ago. Kind of how you see that evolving in the mix, and is there something changing about that end market that kind of makes the opportunities there, sort of less aligned with where you wanna take the company?

Horacio Rozanski (President and CEO)

You know, the intel business is a very important part of our portfolio. We are very proud of the work that we do there. It fits within our overall national security approach, there's very close integration between what we do in defense and what we do in intel, and increasingly between what we do in some areas of intel on the cyber side, and the work that we do on some of the civilian agencies around critical infrastructure protection and the like. The percentages and everything else are really driven by where we see opportunity at any point in time. In the last few years, our civil business has done extraordinarily well and has become a bigger share of our business, that's a business that continues to do very well, and we're very proud of it.

you know, as we look into this year, I think we think our intel business will level out, be more sort of towards the modest growth, maybe even flat, as there's been some, contract turnover, that we've been talking about. I think what's really important to also talk about, which is not going to be in the numbers, is that there's a unique talent base in there that, through our National Cyber Platform, is being leveraged across the institution and creating growth in both defense and civilian clients, and creating a lot of sustainability, across the business.

I think that's a big part of why Booz Allen is successful through different cycles, is that we actually have in our operating model and the way we work together, the ability to shift resources, I believe, much faster than anyone else. I think that's a capability that is going to continue to serve us well, given the environment that we're in right now.

Matt Calderone (EVP and CFO)

If you think about the leading-edge capabilities that Horacio talked about, a lot of them have been really built and incubated into our intel business. So in terms of the role it plays in our portfolio, historically, it has not grown as quickly as other portions of our portfolio, largely because of supply constraints in a highly clear environment. But the capabilities that the intel business develops, and we export across the remainder of our business, in addition to the people Horacio described, you know, really are fundamental.

Seth Seifman (Vice President, Equity Research Analyst)

Excellent. That's helpful. thanks very much. Just as a follow-up, I wonder if you guys could talk a little more specifically about, you know, this kind of second half budget environment that you're thinking about, just to kind of put a fine point on it. 'Cause there's, you know, there's one set of outcomes that's, you know, maybe people had been thinking about, that was, you know, sort of involving government shutdowns, continuing resolutions, kind of, you know, really challenging, kind of, scarier stuff.

There's another, you know, kind of path that's been talked about in some very recent reporting that's kind of, okay, maybe there's, you know, very low single-digit growth in the defense budget over the next few years, which, you know, maybe is not an ideal outcome, but, you know, given the other possibilities, not that bad either. When you talk about a slowing second half and kind of not seeing the momentum continue in the second half, was that based on the idea of, like, full year continuing resolution, government shutdowns type of scenario, or, and an environment where we do get low single-digit growth is a good outcome, or is that kind of consistent with kind of a real slowdown in the second half?

Horacio Rozanski (President and CEO)

You know, if you look at our guidance, you know, 7%–11%, the top end of the range assumes that the second half looks a lot like the first half, a little bit more like what happened this last year, where, you know, there was a full budget passed in December, that actually created certainty for our clients, and that was very helpful. Towards the end, the lower end, it would be more uncertainty faced by our clients. I wanna point out to you, in a business like ours, you know, the specific numbers, we don't have almost any programs that are dependent on line item in the budget.

This is really around how our clients see their opportunity to get things done and how either enable or impair that is going to be, and it's more of a perception from their perspective around what's happening than a specific number. The sooner there's certainty about what's going to happen, almost regardless of what that certainty is, the more our clients can prioritize. I think we're well positioned. We're not going to be immune to cuts if there are cuts, but we're well positioned to be more resilient against that because we're at the center of the mission, doing unique and very important work. And that's, you know, really is how soon do we get to certainty?

Overall, again, you know, I'll leave you with a thought that we are guiding to a very strong set of numbers for FY 2024, very strong organic revenue growth, and really on track with what we said was our investment thesis goal for FY 2025. We're happy with where we are.

Seth Seifman (Vice President, Equity Research Analyst)

Great. Great. Thank you very much.

Operator (participant)

Thank you. This concludes the question and answer session. I would now like to hand the call back over to Horacio Rozanski for closing remarks.

Horacio Rozanski (President and CEO)

Let me thank you all for your questions and for joining us this morning. As always, Matt and I are very proud of what the firm has accomplished, and we're optimistic about the future. We have 32,000 people almost at Booz Allen now, and they're working as hard as ever to serve our clients and to really change the world. It's because of them, really because of them, that Booz Allen continues to thrive. We look forward to another year of growth and success in fiscal year 2024 and to sharing information with you over time. Thank you again for joining, and have a great day and a happy Memorial Day.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.