Booz Allen - Earnings Call - Q4 2025

Executive Summary

• Q4 FY2025 delivered solid results: revenue $2.974B (+7.3% YoY), adjusted EBITDA $316M (+10.5% YoY), and adjusted diluted EPS $1.61 (+21.1% YoY); quarter-end backlog hit a record $37.0B and TTM book-to-bill was 1.39x.
• Versus S&P Global consensus, Q4 revenue and EBITDA came in below expectations, while EPS was essentially in line; management highlighted strong Defense and Intelligence demand offset by Civil run‑rate reductions and a proactive Civil restructuring. Values retrieved from S&P Global.*
• FY2026 guidance initiated: revenue $12.0–$12.5B (0–4% growth), adjusted EBITDA $1,315–$1,370M (~11% margin), ADEPS $6.20–$6.55, FCF $700–$800M; quarterly dividend maintained at $0.55 per share.
• Strategic and technology positioning in AI was emphasized; AI revenue grew >30% YoY to ~$800M, and management is accelerating outcome‑based contracting and GSA/FAR procurement modernization—key stock narrative catalysts.

What Went Well and What Went Wrong

What Went Well

• Strong top and bottom-line execution: Q4 revenue +7.3% YoY to $2.974B; adjusted EBITDA +10.5% YoY to $316M; adjusted EPS +21.1% YoY to $1.61, with record backlog ($37.0B) and 1.39x TTM book‑to‑bill.
• Defense and Intelligence markets drove growth; management: “Our customers are looking for value and outcomes that matter... Booz Allen's tech works.” — Horacio Rozanski. Q4 Defense revenue rose to $1.527B and Intelligence to $458M.
• AI leadership as growth engine: “In FY ’25, our AI business grew over 30% year-over-year to approximately $800 million,” with expanding enterprise deployments and missionized commercial tech partnerships (e.g., NVIDIA at the edge).

What Went Wrong

• Civil market softness and reset: five large Civil tech contracts reduced run rate (~3% firm‑wide revenue headwind), compounded by an additional ~3% headwind from the previously lost VA recompete; management is restructuring Civil (targeted cost and headcount actions) to match demand.
• Quarterly book‑to‑bill of 0.71x implies near-term variability in converting bookings to revenue despite robust TTM metrics; qualified pipeline at $53.4B below FY2025’s record but above FY2024.
• Near-term margin upside limited: management guided margins roughly flat YoY for FY2026 (~11%), noting mix and outcome-based transition cadence; net interest expense remains a partial headwind.

Transcript

Operator (participant)

Good morning, and thank you for standing by. Welcome to Booz Allen Hamilton's earnings call covering fourth quarter fiscal year 2025 results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions, and I'd like to turn the call over to the Head of Investor Relations, Dustin Darensbourg.

Dustin Darensbourg (Head of Investor Relations)

Thank you. Good morning, and thank you for joining us for Booz Allen's fourth quarter fiscal year 2025 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 Chairman, Chief Executive Officer, and President; Matt Calderone, Executive Vice President and Chief Financial Officer; and Kristine Martin Anderson, Executive Vice President and Chief Operating 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 our future financial performance and involve known and unknown risk, 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 fiscal year 2025 earnings release and slides. Numbers presented may be rounded and, as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our Chairman, CEO, and President Horacio Rozanski. We are now on slide four.

Horacio Rozanski (Chairman, CEO, and President)

Thank you, Dustin. Welcome, everyone, and thank you for joining the call today. Kristine, Matt, and I are proud to share strong financial results for fiscal year 2025, as well as our outlook for fiscal year 2026 and beyond. I am happy to welcome Kristine to the Q&A portion of the earnings call. Booz Allen delivered a strong year of top-line and bottom-line growth in FY 2025. We also reached $1.315 billion of adjusted EBITDA. This exceeded the top end of our ambitious target range we set at our investor day in October 2021 and represents 12% compounded EBITDA growth, nearly all organic, over our investment thesis period. I am incredibly proud of the people of Booz Allen for their dedication and hard work over the past three years. These results are a credit to them.

Through a changing landscape, they remain focused on delivering outcomes and bringing their passion and commitment to America's most essential missions. A heartfelt thank you to our colleagues for all you do for our company and for our nation. To frame the conversation about fiscal year 2026, let me reiterate what I mentioned on the October earnings call. All presidential transitions create some degree of near-term disruption followed by opportunity. Half a year later, we now see that these dynamics are indeed in play at a rate and speed that is beyond what we originally expected. As the Trump administration focuses on reducing government spending, increasing efficiency, and reimagining agency missions, Booz Allen must once again adapt and accelerate. Let me begin by describing the current environment as we experience it.

The federal government is rethinking agency missions, finding ways to accomplish those missions differently, and looking for ways to reduce spending and increase efficiency. To get there, we are seeing agency reorganizations, reductions in government personnel and spending levels, as well as contract reviews. These are especially acute in civilian agencies, and as a result, we are seeing a decrease in the pace of awards in civil, as well as run rate changes in some of our contracts. At the same time, the government is leading initiatives to improve procurement regulations and practices, such as the revision of the Federal Acquisition Regulation, or FAR, and we expect to see more contracts moved to fixed price and outcome-based. We also see a focus on massively upgrading legacy systems and rapidly injecting advanced technology into revised missions.

These present great opportunities for more impact and increased value to the government, as well as stronger financial performance for Booz Allen. In combination, these dynamics are currently impacting Booz Allen's view of FY 2026. We believe that our defense and national security portfolio will continue to grow this year as we accelerate the injection of AI and commercial technology into missions. In contrast, we expect our civil business to decline this year. Diving more into civil, our largest contracts have been reviewed. We are proud that our solutions stood up well, that our contracts are mostly intact. The work is excellent, and the missions are critical. Having said that, the run rate on five large technology contracts has been reduced significantly in support of the administration's desire to reduce spending overall. The slowdown coincided with the ending of a large technology contract at the VA.

Together, this led to a significant number of employees needing to be redeployed simultaneously. Under normal circumstances, and as our history shows, the dynamism of our business typically allows us to move our highly skilled talent quickly to new opportunities. At a time when procurements are moving much slower than normal, this has been challenging. As we proactively anticipate continued market and budget dynamics, we have made the decision to restructure and reset our civil business. We are making targeted cost and headcount reductions to match anticipated demand. These are a combination of reductions in bench, delaying of management, and adjusting our infrastructure to match. These decisions are difficult, and they are not taken lightly. Our actions are very targeted, and we believe that they will preserve and enhance our ability to invest, both in our business and in our people.

Matt will cover all the details of our FY 2026 outlook in a few minutes. Now let me talk more about the opportunities on the horizon, especially those being created through our close collaboration with the General Services Administration, or GSA. GSA wanted to explore ways they could transform and centralize government procurement. They began a contract review exercise looking for efficiencies, cost savings, and opportunities to bring in new tech like AI. We were in the first group of companies to take part in that exercise, which has since expanded to include many more companies in our industry. I'm proud to say that GSA and Booz Allen have built a very productive relationship. I want to highlight two specific outcomes of our efforts. First, GSA got to know us better. They now understand the value we deliver across a full range of missions.

This is important because GSA and the Federal Acquisitions Service, or FAS, will be driving an efficiency agenda across government for the foreseeable future, including the consolidation of services and acquisition processes. Second, we have a unique opportunity to offer FAS our thoughts on how to accelerate the move to outcome-based procurement and bring agentic AI capabilities to enable these conversions. For years, I have argued that the move to outcomes was necessary for the federal government. GSA and FAS understand this and are leading the way. We are optimistic that a process that could have taken a decade or more will be accelerated during this administration. We believe a more efficient government will buy differently, more commercial technology, more outcomes, streamlined processes, and greater speed. Looking ahead, we anticipate these procurement improvements will set a foundation for a new kind of growth.

We are committed to moving fast in those directions so that we can both help these initiatives succeed and be successful ourselves. We're optimistic about the opportunities ahead because our VOLT strategy, which stands for Velocity, Leadership, and Technology, is aligned with the changes we are seeing across government. We have a leading position in the major technologies that will drive mission acceleration and efficiency, especially AI. We have a track record of building successful partnerships with technology firms of all sizes, from startups to hyperscalers. We have strong positions and are working nonstop to create value in the areas that matter most, from reducing duplication and cost to increasing readiness and lethality for the warfighters defending our nation. Let me provide some color in each area. Starting with artificial intelligence, there is significant demand, and that demand is only increasing.

In FY 2025, our AI business grew over 30% year over year to approximately $800 million. As AI becomes increasingly foundational to how the government operates, agencies are investing more and moving toward enterprise-scale implementation. In defense and intelligence, AI is now embedded in mission workflows, enabling faster imagery analysis through computer vision, enhancing decision-making through tailored generative models, and delivering autonomous solutions at the tip of the spear. With more than a decade of investment, enhanced on implementation experience, Booz Allen is well-positioned to lead the next phase of AI transformation across the federal enterprise. Next, we are strengthening private sector partnerships and are a proud leader in the advanced technology ecosystem. We are building on a proven track record of accelerating the adoption of technologies that produce impactful mission outcomes.

We recently announced we are combining our expertise in AI and 5G and 6G with NVIDIA's transformative technologies to accelerate the delivery of edge applications. We also continue to invest in early-stage technology companies through Booz Allen Ventures. We believe that we are stronger together, which is why we will continue developing our technologies and combine our strength with others. Lastly, we are continuing to share our big ideas, working in partnership with our customers and the private sector. For example, we are talking to multiple agencies about cloud migration and consolidation. We have big ideas for transitioning thousands of data centers to a cloud-based architecture to make data more accessible. The private sector has already done this, and we've seen that it's more efficient, cheaper, and more secure, all of which aligns with the administration's vision.

Importantly, making data more readily available is also crucial for our warfighters because it allows us to apply advanced AI tools to increase their readiness and lethality. One way we are doing this is by collaborating with the United States Army. We are building an AI-enabled tactical software system to more quickly recognize targets and generate call-for-fire missions. The prototype can reduce the time to respond to threats from 15 minutes to 1 minute. The bottom line is this: we understand our customers' mission needs, and we have the technical expertise to deliver solutions that not only meet those needs but also anticipate what's next. That gives me great confidence in Booz Allen's ability to maximize the opportunities ahead and provide the advanced technologies America needs to thrive.

In this period of transformation for Booz Allen and our nation, we will accelerate by focusing on the following operating priorities for FY 2026. We are resetting and restructuring our civil business, so it returns to growth rapidly after an adjustment period in the coming months. We are positioning ourselves to lead the way and capture major outcome-based opportunities. This includes reimagining how we deliver our work, such as using AI to accelerate software development, increase our value, and reduce costs to the government. We are directing significant resources to the areas that will best position us for growth. This includes missions in Indo-Pacific and space, as well as critical technologies like agentic AI, quantum, and software-defined communications. We are rapidly advancing our partnerships with established technology firms and new entrants.

This entails going to market together to provide novel solutions, as well as becoming their scaling partner as they capture demand across their broader markets. Finally, we are continuing to create efficiencies in our own business so we can move faster, invest more, and realize greater shareholder value even in a volatile environment. To wrap things up, I hope that you will take three things away from my remarks this morning. First and foremost, Booz Allen is not standing still to see what happens next. We are moving aggressively to lead the way in a changing market. Second, we are strategically advantaged. We have been investing ahead of these changes, both in our own positions and in the critical partnerships that will be required. Third, we're on the side of change. We are committed to America's priority missions and to enabling a more nimble and efficient federal government.

For all these reasons, while recognizing that there are challenges ahead, the people of Booz Allen are energized, and we are optimistic. We are ready to meet this moment. With that, Matt, over to you.

Matt Calderone (EVP and CFO)

Thank you, Horacio. Good morning, everyone. I also want to take a moment to express my sincere appreciation for the hard work and dedication of Booz Allen's people. We are in a period of rapid change. Technology is changing, our missions are changing, and our customers are changing. Booz Allen's people continue to lean into this change. They are rising to the challenge of transforming Booz Allen and delivering the technology and mission outcomes that this country needs. I am confident that Booz Allen will continue to deliver significant value to our customers, our nation, and our shareholders.

We said on our most recent earnings call that we anticipated a period of short-term disruption and a slowdown in the procurement environment, particularly in our civil business, and that this would be closely followed by meaningful new growth opportunities. In his remarks, Horacio described both the disruption and the ample opportunity we are experiencing. You will see the impact of these two dynamics, which are beginning to overlap and are not playing out evenly across our markets in both our results for the fourth quarter of fiscal year 2025 and our guidance for fiscal year 2026. Before we dive into the quarter, I'd like to cover the highlights of our overall performance for fiscal year 2025. Please turn to page five. For the full fiscal year, we delivered over 12% revenue growth, nearly all of it organic.

We ran the business efficiently, enabling us to deliver another year of double-digit profit growth. Our adjusted EBITDA increased 12% to $1.315 billion. This yielded an adjusted EBITDA margin of 11%. Adjusted diluted earnings per share grew over 15%, driven by increased profitability and a lower share count. We generated robust free cash flow of $911 million. We deployed a total of $1.2 billion of capital to generate shareholder value, including repurchasing about 4.3% of our shares outstanding since the beginning of the fiscal year. We did this while maintaining a net debt-to-adjusted EBITDA ratio of 2.4x. Finally, as Horacio noted, with this performance, we exceeded the ambitious multi-year investment thesis targets we put out at our 2021 Investor Day. This was done almost entirely through organic performance and leaves us ample balance sheet capacity to generate incremental shareholder returns in the future.

In summary, we delivered yet another excellent fiscal year. I will now turn to our fourth quarter performance. In the fourth quarter, we delivered solid results. For the quarter, top-line revenue grew 7% year over year to $3 billion. Almost all of this was organic. Revenue, excluding billable expenses, was up 6% year over year. For the fourth quarter, growth was driven by strong performance in our defense and intel businesses, where revenue was up 14% and 5% respectively versus the prior year. Our defense business continues to deliver cutting-edge technical and mission outcomes that are critical to the warfighter and to our nation's efforts to deter our adversaries. Our intel business continues to gain momentum as we are solving some of the nation's most challenging technical and intelligence problems. We anticipate that both our defense and intel businesses will continue to exhibit strong organic growth in fiscal year 2026.

For the past few quarters, we have described a slowdown in the civil procurement and spending environment. Over the last few months, these trends accelerated. Since the beginning of April, we have seen a reduction in run rate on five of our large civil technology projects that we believe will collectively create about a 3% headwind to firm-wide revenue for fiscal year 2026. As Horacio noted, these forces have limited our ability to redeploy staff in the near term, including talent rolling off one of our civil contracts that ended last fiscal year, the previously disclosed recompete that we lost at the VA. The impact of this loss now represents an additional approximately 3% headwind to our consolidated top line for FY 2026.

As a result of these factors, year-over-year revenue in civil was flat in the fourth quarter, and we now anticipate that our civil business will see a revenue decline in the low double digits in fiscal year 2026. However, we do anticipate our civil business will rebound as a number of big transformation and efficiency initiatives for our civil customers are already beginning to take shape. Pivoting now to demand, net bookings for the quarter totaled $2.1 billion, resulting in a quarterly Book-to-bill of 0.71x, in line with historical averages. This brought our trailing 12-month Book-to-bill to 1.39x, above our trailing five-year average of 1.28x. We ended the year with a record year-end backlog of $37 billion, up 15% year over year. Our qualified pipeline for fiscal year 2026 is $53.4 billion.

This is below our record qualified pipeline for fiscal year 2025, but importantly, is higher than our pipeline for fiscal year 2024. Given market dynamics, in the short term, we anticipate that there will be more variability in converting bookings to revenue than we have seen in previous years. That said, we believe we have the backlog, the pipeline, and the big ideas for customer transformation needed to support our medium and long-term growth aspirations. On the talent front, Booz Allen closed the fiscal year with nearly 36,000 employees. Our customer-facing staff grew 4.2% year over year. Due to the contract impacts we've described, we anticipate that we will see an approximately 7% reduction in Booz Allen staff in the first quarter. This is very heavily concentrated in our civil business.

We are moving aggressively to right-size our talent base, both to match immediate contract-level demand and to reshape our workforce for the future. This decision was painful, but by taking this action, we have ensured we have both the capacity to invest in growth and the right talent to deliver against future mission needs. Turning now to profitability, adjusted EBITDA grew to $316 million, up 10.5% over the prior year quarter. This translated to an adjusted EBITDA margin of 10.6%, up 30 basis points over the prior year's quarter. Working down the P&L, our net income was $193 million, 51% higher year over year. Adjusted net income was $203 million, up 17% from this time last fiscal year. Diluted earnings per share was $1.52 per share, a 55% increase from the prior year period. Adjusted diluted earnings per share was $1.61 per share, up 21% year over year.

The increase in fourth quarter ADEPS was driven by our overall profitability, a reduction in share count, and a gain from the close of the sale of SnapAttack. This was slightly offset by higher net interest expense. Transitioning to the balance sheet, we ended the fiscal year with $885 million of cash on hand, net debt of $3.1 billion, and a net leverage ratio of 2.4x adjusted EBITDA for the trailing 12 months. During Q4, we executed a $650 million bond issuance. This transaction was well received by the credit markets and provides us with additional liquidity and the capacity to opportunistically deploy capital. Our free cash flow for the quarter was $194 million, the result of $218 million of cash from operations, less $24 million of CapEx. Moving now to capital deployment, during the quarter, we deployed a total of $403 million to generate value for shareholders.

This included $310 million in share purchases at an average price of $118.96 per share. We also made $23 million in strategic investments, including our recently announced investment in Shield AI. Finally, we paid $70 million in quarterly dividends. Today, we are pleased to announce that our board of directors has approved a quarterly dividend of $0.55 per share, which will be payable on June 27 to stockholders of record as of June 11. We continue to have a very strong balance sheet. This gives us flexibility in how we operate our business and the ability to deploy capital in response to the evolving environment in ways that generate additional value for shareholders. Now, please turn to page nine, where we provide our outlook for fiscal year 2026. As Horacio acknowledged, today's environment is extremely dynamic.

We have less visibility into the forces that will shape business performance than we typically have at this point in our fiscal year. Our fiscal year 2026 outlook is informed by our current assessment of the many factors that will drive performance. This includes anticipated growth in our defense and intel businesses and a near-term reset of our civil portfolio. Our fiscal year 2026 guidance is as follows. We expect to deliver revenue between $12 billion-$12.5 billion. We expect to generate adjusted EBITDA in the range of $1.315 billion-$1.37 billion. This implies a four-year adjusted EBITDA margin of about 11%, on par with fiscal year 2025. We expect ADEPS to be in the range of $6.20 per share-$6.55 per share. This assumes an adjusted effective tax rate between 23%-25%, as well as a marginally higher interest expense.

It does not assume any impact from our venture investments. Lastly, we expect free cash flow to be between $700 million-$800 million. As we forecast our growth cadence for the full year, we anticipate that revenue and profit growth will be comparatively lower in the first half, particularly in our second quarter, given strong prior year comps and the impact of the one-time actions we have described today. We then anticipate a meaningful re-acceleration in the second half. This is based on the strength of our backlog, the size of significant recent wins in our opportunity pipeline, and the expectation of a meaningful uptick in hiring. In closing, we could not be prouder of how we finished fiscal year 2025, the final year of our investment thesis. Our results show our relentless focus on the mission, on operational excellence, and on generating shareholder value.

Booz Allen continues to transform. While cognizant of the uncertainty in our environment, we are excited about our strategic direction, our alignment to the government's mission priorities, and our central position in the evolving technology ecosystem. We remain very optimistic about the future. With that, operator, let's open the line for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, simply press star one one on your telephone and wait for your name to be announced. To remove yourself, press star one one again. One moment for our first question. It comes from the line of Gavin Parsons with UBS. Please proceed.

Gavin Parsons (Director of Aerospace and Defense Equity Research)

Hey, thanks, guys. Good morning. In this environment of unpredictable, I guess, descoping and cancellations, how do you get comfortable that kind of you've got your arms around the impact and that there's not potentially more to come throughout the year?

Horacio Rozanski (Chairman, CEO, and President)

Hey, Gavin, thanks for the question. Let me try and frame the entirety of what we see and try and answer your question from that perspective. I'll start by saying I'm very proud of the last year, very proud of the last three years, and our ability to demonstrate significant shareholder value creation through what was already a changing environment. As we look at the world now, we are seeing two sets of overlapping dynamics. One set of dynamics is, as we said in the prepared remarks, our civil business is going through what we hope, we believe will be a one-time reset, where most of the reviews have been concluded very positively regarding our technology and our work. We are facing this deceleration at a time where procurements are still somewhat frozen.

The other side of the dynamic is continued strength in our defense business and growing strength in our intelligence business. That is sort of one set of dynamics. The other dynamic is, while we are seeing, we have seen, especially in civil, some of these resets, which, by the way, was mostly, as we pointed out, the slowdown in spending against a few technology contracts. There have been relatively few and far between, call it 1% of our portfolio that has been outright canceled. That really tracks to what the 1% of our portfolio that we deemed was actually consulting-type programs, which is really legacy work that we were doing. The other side of it is, first of all, in defense and intel, we are still winning work against a strong procurement environment.

Even in civil, we're beginning to see opportunities take shape that we will take advantage of. Our approach has been to take a significant restructuring in our civil business now so that we are positioned to grow and so that we can invest across the portfolio, where, again, the one P&L really helps us. Because the environment in defense and intel is so dynamic and the procurement activity is still strong, we're in a position to absorb things there as well and continue a strong growth vector as we see it right now. Ultimately, from a strategy standpoint, as we pointed out, we believe we are extraordinarily well aligned and well positioned against both the key missions, the key technologies, and the major opportunities we see in the horizon.

Gavin Parsons (Director of Aerospace and Defense Equity Research)

Thank you. I'll leave it at one. Appreciate it.

Operator (participant)

Our next question comes from the line of Colin Canfield with Cantor Fitzgerald. Please proceed.

Colin Canfield (VP and Equity Research Analyst)

Hey, maybe if we could talk about some of the comments you made around kind of reset and what your expectation is on the multi-year growth environment. Maybe just kind of digging into how you think about kind of defense and civil and kind of where we stand on the reality of FY 2025 SUP versus FY 2026 request and kind of what you're hearing from congressional folks. Also maybe, Matt, if you could talk about kind of how you think about repurchases and what the boogie is for the year. Thanks.

Horacio Rozanski (Chairman, CEO, and President)

Why don't I start with sort of the macro level, and then maybe Kristine can talk a little bit about each one of our markets, and then Matt will cover the back, your second question, I guess.

I think the way we see the environment very much matches the way we're seeing the budgetary environment, right? I mean, the bill that is making its way to the Senate as we speak has a significant plus-up for defense. At the same time, the stated priority about reducing discretionary spending on some of the civil agencies and actions that have already taken place is what we are talking about. Our civil business, I think, has already gone through the majority of its reviews.

In defense and in intel, this is what we're seeing: doubling down on priorities around Indo-Pacific, where, as you know, Booz Allen has a very strong footprint and a lot of growth opportunity in space, both in programs that are already underway, where we have a strong place, and opportunities around Golden Dome, where we believe we have unique technology and capability to bring to bear. The defense of the homeland, which is really around, especially the southern border, and which is the integration of not just defense, but defense, intelligence analysis, and certainly the civil agencies that are primarily responsible. What they're trying to do there is primarily inject technology, a lot of commercial technology, agentic AI. The discussion has really moved away from whether AI was important to national security to how fast can we implement AI in national security.

Booz Allen, again, has a tremendous track record there.

Kristine Martin Anderson (EVP and COO)

I would say for our civil business in particular, while there have been some slowdowns in contracts, it really reflects the administration's desire to tackle really big challenges, really advancing the tech even faster. We have been very excited about the opportunity to present our ideas. We have developed and are in discussions with the government on tens of big ideas, and we're getting really positive responses. It's actually pretty exciting to be asked to extend some successful advanced tech solutions in one mission to others. We were ready, right? We had already been piloting both AI-assisted coding and agentic AI on a large software program that's almost insatiable in its requirements. We were able to lean into the call for efficiencies and move past the pilot to full production across the program.

It's a win-win-win for us, the government, and the Americans that are served by that program. Also, in defense and intel, the business is very strong, and we are very aligned with the administration's priorities to counter China and protect the homeland. We are anticipating that our counterterrorism expertise will position us really well against a sophisticated threat. We have also presented very big, bold ideas there as well and are in discussions around them.

Matt Calderone (EVP and CFO)

Hey, Colin, I'll take your balance sheet capital deployment question. Obviously, the balance sheet continues to be a strength of ours. We deployed $1.2 billion last year and basically maintained leverage. The strength of our organic growth over the past couple of years has allowed us to deploy a lot of capital to generate value for shareholders.

I think we've demonstrated our ability both to deploy capital consistently across the board, but also to be flexible inside the various modalities of capital deployment to deploy where we think we can generate the most value. We've shown that we will buy back our shares. We believe that it's good value for shareholders. We're still committed to M&A, more biased to tuck in than ever, given how rapidly the technology market is changing and our need to continue to invest to acquire technologies that are leading edge and will advance and accelerate our strategic objectives. I do think you'll see us lean in a little bit more on the venture side as well. We've gotten tremendous value. We're beginning to see it on the financial side, but really on the strategic side from our venture investments. It's part of our long-term commitment to be a commercial technology accelerator.

I think that's one of the macro trends that Horacio and Kristine referenced, where we've really been at the forefront. I think you'll see us accelerate that as well. Committed to deploying capital, share repurchases obviously is an important lever there.

Colin Canfield (VP and Equity Research Analyst)

Got it. Thank you for the color.

Operator (participant)

Thank you. One moment for our next question. It comes from Sheila Kahyaoglu with Jefferies. Please proceed.

Sheila Kahyaoglu (Managing Director of Equity Research)

Good morning, Horacio, Matt, and Kristine. Thank you. Maybe if we could start, two questions for you guys. You could hear me okay?

Horacio Rozanski (Chairman, CEO, and President)

Can you speak a little louder? It's a little quiet in the room.

Sheila Kahyaoglu (Managing Director of Equity Research)

Oh, sorry about that. Maybe if we could talk about the low double-digit decline for civil in fiscal 2026, how do we think about the catalyst for that stability in the business? We're talking about second half improving.

PTEMS is maybe a few points of that. How do we think about other program specifics that are driving it? When do you think about the improvement in civil again?

Kristine Martin Anderson (EVP and COO)

Yeah. The vast majority, as Horacio mentioned, of our civil programs have already been reviewed. I would remark that we were not targeted in those reviews. What we saw was agencies and departments looking at their full portfolio with targets in mind and whether it was on or off the GSA list. This is really agency-driven. Our tech and our talent fared really well in those reviews. There has been a short-term slowdown in the actual burn rates as they start to position for some of the transformation objectives that they have in bringing new tech in. Our view overall is that to win in that environment, you need three things to be true.

One, the tech needs to be excellent. We have received really high marks for our technical work and the quality of our people. Second, you have to have a vision around how that tech will evolve in a direction that makes sense to commercial tech leaders that come from outside government. For example, our cloud, our AI-assisted coding, and our agentic AI have been recognized, and that's already leading to new opportunities. Third, you have to be willing to convert your contracts to outcome-based, particularly in civil. We have been a long-term champion of that shift because we love that agility and flexibility that you get in the tech staff and staffing. The pivot part really comes from being able to extend those capabilities to accelerate the mission areas.

Horacio Rozanski (Chairman, CEO, and President)

Yeah, Sheila, the only thing I would add to that, and I think two thoughts.

First of all, I think our thought process is we wanted to do a one-time reset and restructuring of our civil business so it can regain a growth trajectory as quickly as possible. Because a lot of it is happening in quarter, it may take through next quarter to work itself through the financials. We are beginning, as Kristine said, to see the opportunities. The other thing is, as with any new administration, the procurement environment slowed down significantly, almost froze in a number of these agencies because the below cabinet-level positions had not been filled, and people were waiting to see what the specific agendas were. Now that those are beginning to get fleshed out, we are getting strong indications that because our tech works and we are so positioned against the things that they are trying to do, we are going to see growth in the second half.

Sheila Kahyaoglu (Managing Director of Equity Research)

Got it. Maybe if we could just talk about your typical revenue algorithm, it is usually based on headcount and some salary composition. How do we think about the down 7% in Q1 for headcount? I think that was total company. How do we bridge that to the revenue of SLAT to up below single digits?

Matt Calderone (EVP and CFO)

Yeah, Sheila, thanks. I'll start. You're correct. 7% was total company, but very heavily concentrated in our civil business. I think, look, our business is changing, and there are three dynamics or three areas where the "traditional algorithm" may look a little different than what we've experienced in the past. The first we referenced in the prepared remarks, we're actually winning a lot of work, right? Our Book-to-bill last quarter was 0.7x, very much in line with historical averages.

Just to give you a dollar figure, that's about a little over $2 billion in work we won. We won a lot of work this quarter, particularly in our defense and intel space. We anticipate that our Book-to-bill this quarter will be in line, if not better, than historic norms. The first thing we referenced is the conversion of backlog and bookings to near-term revenue, which I think will be a little bit more variable than we've seen in the past, just because there's less consistency in sort of in-year spending actions. That's one. The second is with the move to outcome-based contracting, we've talked about that for years. We've been very much an advocate for it. It's good for us, good for the government. Over time, you'd expect that to be accretive to margins.

The third is what you referenced, which is the traditional headcount math. I think we've talked about for the majority of our business, that's not fixed price. Typically, the algorithm is headcount growth plus 3%. Given that the preponderance of the headcount reductions we are seeing is in our civil business, and that is less, it's more fixed price. It's less dependent on billing by the hour. I'm not sure you're going to see it exact. You're just not going to hold exactly to historic equations. I think it's going to break that math a little bit. It's still a very good predictor in our defense and intel business. Headcount tends to be the best predictor in the near term of what revenue looks like.

When you add it all up, particularly given the year-over-year comps from last year, where we had a strong first half, we do expect our first half this year to be a little bit more under pressure, but to see acceleration in the back half, particularly as hiring picks up and we get through this period of resetting and rebalancing.

Kristine Martin Anderson (EVP and COO)

Yeah, I would add that we're always hiring, right? Every month, we're adding hundreds of employees. We do expect to add significant headcount in the second half of the year. We have really matured our AI-enabled advanced tech solution that we use for recruiting and deployment of staff. We're looking to be even more effective at that this year.

Sheila Kahyaoglu (Managing Director of Equity Research)

Got it. Thank you.

Operator (participant)

Thank you. One moment for our next question. He is from the line of Ronald Epstein with Bank of America. Please proceed.

Ronald Epstein (Managing Director of Aerospace and Defense Equity Research)

Yeah. Hey, guys. I'm on for Mariana today. She's traveling. Maybe just a couple of things. And you alluded to it a little bit earlier. If the government's looking for more commercial terms, even in defense, how do you invest in the right things to do that? How are you set up to do that? It does seem like in the defense market, the government is looking at different ways of contracting, and there's a bigger push for commercial terms. So how do you think about it, and how does that impact your business?

Horacio Rozanski (Chairman, CEO, and President)

Yeah, Ron, yeah, I'll start. I think the trend that you're pointing out is one that we've been tracking for a while, and it's actually accelerating. I think this is why we have built partnerships and made investments all the way from hyperscalers to the startups and everything and everyone in between.

We have been doing that for a while. I think it's fair to say, and you'd have to ask them, but I think I'll say it, that we are the preferred player in terms of helping these commercial solutions get missionized in a way that they make sense, that we have created the capacity and the ability to co-create with them. I often talk about the fact that, for example, even edge cloud solutions that have been created for the commercial markets assume a degree of connectivity that doesn't happen in space and doesn't happen underwater and doesn't happen in EW-challenged environments. We have built our own tech to put on top of their stack to solve those kinds of problems, and we're recognized for that. We actually both have been a proponent and welcoming this notion.

As Dennis might point it out, more recently, because we have such good relationships with many of these firms, they're coming to us more broadly to talk about, "Help us scale. Help us think about what are all the things we need to do that will make us bigger and better." We're making investments in some of these companies, like we've done directly with Shield AI. Our venture portfolio of startups is really performing very well in all of that. When I look at all of it, this notion of commercial tech being more aggressively utilized in defense is a net positive to Booz Allen given that we're partnering with them to create those solutions.

Ronald Epstein (Managing Director of Aerospace and Defense Equity Research)

Got it. Got it. Maybe as a follow-on, and I think Sheila was getting at this, but maybe softer, but I'll be more direct.

It does seem like, at least perceptionally, you guys have a branding issue. Meaning every kind of article that we saw about DOGE and consulting and government contractors and so on and so forth, you see pictures of Booz Allen. Booz Allen pops up all over the place. Seemingly, at least from my vantage point, that seems unfair. That being said, why do you think that's the case? What do you do about it, about pivoting into maybe a better spotlight in the government?

Horacio Rozanski (Chairman, CEO, and President)

I think I would say a couple of things about this. First of all, I think when you're the market leader, you're the most interesting to write about. We have the distinct pleasure of being written about a lot. As you know, we tend to be relatively humble and quiet about our own communications.

We have always wanted our customers to take the credit for the win because ultimately, it is certainly their decisions to make that, and our tech supports them. We found ourselves in that reality. What we do about it is we have gotten a lot better at telling our story. I think that is resonated. Some of it is what you see in terms of us being in the media more and having a lot more conversations and clarifying our positioning as an advanced technology company. I think that is working. Also, the part you do not see is the number of conversations we are having with people across the administration and the relationships that we are building. I think, as Kristine pointed out, this is true certainly in our civil business, but it is true more broadly.

I think once people start to really interact with the technology that we've built, that speaks much louder than a newspaper article ever could. We're, I think, emerging from that transition with our brand ultimately is going to be strengthened as a result of all of this scrutiny.

Ronald Epstein (Managing Director of Aerospace and Defense Equity Research)

Got it. All right. Thank you.

Operator (participant)

Thank you. Our next question is from Louie DiPalma with William Blair.

Louie DiPalma (Managing Director and Senior Equity Research Analyst)

Horacio, Matt, Kristine, and Dustin, good morning.

Horacio Rozanski (Chairman, CEO, and President)

Hey, Louis. Good morning.

Matt Calderone (EVP and CFO)

Good morning.

Louie DiPalma (Managing Director and Senior Equity Research Analyst)

You have several large AI contracts, including the Joint Warfighter National Mission Initiative, EMAPS 2.0, and EDVANA. It seems these programs have experienced tremendous success over the years and very wide adoption. Are you still excited about the future of these programs? I think you mentioned how your AI business has grown to over $800 million.

With a lot of the scrutiny, has there been any changes to your optimism for your AI business, particularly with the Department of Defense? Thanks.

Horacio Rozanski (Chairman, CEO, and President)

I'm happy to start with that. Louis, I think the AI is a strength of Booz Allen. I think people recognize it. It's more and more embedded. There are certain programs that early on were sort of the leaders in terms of implementing AI capabilities. AI is now embedded in just about everything that we do. As I mentioned before, we're not seeing AI as a question of, "Is this good for the mission? Will it ever get adopted? Will the Department of Defense adopt AI?" I think all those bridges have been crossed. The question now is how quickly, how do you bring the right technologies?

How do you make commercial technology both safe, reliable, and secure enough to be able to use it against some of these missions? We have a track record of doing that. That is second to none. As we look forward, I would point you to the fact that the move to agentic AI is going to be really transformational for the global economy, for America, and certainly for our national security missions. We have what I believe is a leading position there. We have done some stuff on our own research side that is really breakthrough physical AI, which is sort of the key to autonomy, the key to digital twins, the key to being able to simulate and put AI into the field a lot faster. Significant upside there for Booz Allen.

The third area that we've been talking about for a while and I think is starting to get recognized is this topic of adversarial AI. The reality is all of these models and all these AI capabilities are tremendous and create a potential new attack surface. We are at the leading edge of making sure we know how to defend AI models and AI infrastructure from attack. That'll take me to the last point, which is you've tracked our cyber business for quite some time. I talked before about convergence between cyber and AI and then cyber and AI in space. These are areas where we are doing some really cool leading-edge stuff. You probably saw that we have now upgraded our presence in AI in space by moving Space Llama to the research side of the International Space Station.

Again, that's a research project, but it demonstrates both that it can be done and that we know how to do it. Yes, I am extraordinarily optimistic about the future of AI and Booz Allen's role in it.

Louie DiPalma (Managing Director and Senior Equity Research Analyst)

Great. I guess drilling a little deeper, with EDVANA, do you expect to continue to be the main delivery partner with EDVANA? Similarly with ThunderDome, you just mentioned cybersecurity and zero trust, and you're partnering with several commercial vendors there. For these big programs that you are providing your own unique code and software stack on top of existing commercial offerings, do you expect to continue to add that value for the DoD?

Horacio Rozanski (Chairman, CEO, and President)

In both of those cases and in many others, frankly, I think the reason that these programs have been so successful is that we did not start from scratch, is that we took the best commercial technology and work that we've done and technology that we built to create complete solutions that really address mission needs. I think these programs are standing the test of both the quality of what they're providing and the impact on mission. We are bullish about our ability to continue to work there, to incorporate newer and more commercial technology into these missions so that they can run more efficiently, more effectively, more cheaply, faster, and all of the above. We don't stand still. We're certainly working hard.

Matt Calderone (EVP and CFO)

Louie, I would just add that ThunderDome in particular, but also a number of our other large technology programs, we're working actively to convert them to outcome-based because I think that these programs are ripe given the nature of what we do. As you said, the fact that we are increasingly adding on our own technology, building onto the tech stack of others, and playing a foundational role in generating real products and solutions around these. Outcome-based contracting is the future, and we look forward to continuing to work with our customers across the board to drive that across our large technology projects.

Louie DiPalma (Managing Director and Senior Equity Research Analyst)

Great. Thanks, everyone.

Horacio Rozanski (Chairman, CEO, and President)

Thank you.

Operator (participant)

Thank you. Our next question is from Scott Mikus with Melius Research. Please proceed.

Scott Mikus (Director of Aerospace and Defense Equity Research)

Morning, Horacio. In the wake of the Budget Control Act 2011 and sequestration, there was obviously a lot of consolidation in the industry.

It seems like if the government wants to actually drive efficiencies, they probably need to consolidate a lot of contracts. Do you expect this to drive a push or another wave of consolidation among the government services providers?

Horacio Rozanski (Chairman, CEO, and President)

I think this is, let me start by saying, I mean, if you really look at this industry, it's actually quite fragmented. I think if you aggregate it, what's the concentration, the top number of players in totality, amount of single digit of the available market? When there are processes like this, there are people that take share. There are people that lose share. There are changes to the industry. I think that the significant changes that we are seeing that I spoke to before is you have new defense tech companies coming in very strong to create and drive solutions at speed that weren't there before.

We're looking strongly to align with that. As I look at Booz Allen in all of this, I guess I'll make the three points that I made earlier. We are being aggressive. The fact is we have a strong balance sheet, but more importantly, we are not standing still to continue to position and reposition ourselves and drive shareholder value. We're strategically advantaged because a lot of the things that we did under VOLT are really becoming essential now to delivering the mission. We are on the side of change and of looking for ways to add increasing value to all the missions that we support. When I look at all of that, this current fiscal year, as we've said, is a challenging year, especially in our civil business.

As I look at the medium and the long term, a few quarters out, I am very optimistic that the things that are changing in the environment will actually allow us to be extremely successful.

Scott Mikus (Director of Aerospace and Defense Equity Research)

Okay. Thinking about the non-client-facing headcount, I think it was down 100 people quarter over quarter. You called out the 7% headcount reduction in the first quarter. That is largely in your civil business. Your margin guide is flat year over year. Is there upside to the margin or EBITDA guidance if you reduce that non-client-facing headcount more? Do you get to keep those savings, or do they end up being passed back to the customer?

Matt Calderone (EVP and CFO)

Yeah, we have been, I think, aggressively managing the totality of our cost structure.

I'll remind you that historically, our civil business, because it is more fixed price in nature, has been more profitable than the average. We're really pleased that we're able to manage our cost base in a way that will maintain margins even while we're resetting our civil business, but also, honestly, the capacity to invest and grow because we're continuing to invest ahead of the business, both in building new technologies and bringing on exciting new technical talent in a lot of the partnerships with commercial and defense technology companies that Horacio described. We've been getting a lot leaner over the past few years. We've been getting scale out of the business. We anticipate continuing to do so. I would not anticipate near-term upside in the margins. We talked about long-term as we shift to outcome-based.

There is potential there, but I wouldn't expect that in the near term.

Scott Mikus (Director of Aerospace and Defense Equity Research)

Okay. Thanks for taking the questions and enjoy the long weekend.

Matt Calderone (EVP and CFO)

Thank you.

Operator (participant)

Thank you. This concludes our Q&A session. I will turn it back to Horacio Rozanski for final remarks.

Horacio Rozanski (Chairman, CEO, and President)

Thank you, Carmen. Thank you all for your questions and for being here with us this morning. I hope that Matt and Kristine and I conveyed both a sense of our near-term priorities and also our optimism about what's ahead for our people, for our customers, and for our investors. We are on the positive side of change. We are strategically positioned for an era of tech-driven growth. We are doubling down on what Booz Allen does best, which is using advanced technology to keep America strong and safe. I appreciate all of you being part of how we do that.

Thank you for joining us today.

Operator (participant)

Thank you all for participating. You may now disconnect.