Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's Earnings Call Covering Second Quarter Results for Fiscal Year 2020. 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. Nick Veasey.

Thank you. Good morning and thank you for joining us for Booz Allen's second quarter fiscal 2020 earnings announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We've also provided presentation slides on our website and are now on Slide 2. I'm Nick Veasey, Vice President of Investor Relations, and with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President, Chief Financial Officer and Treasurer. As shown on the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and, therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our Company's services and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our second quarter fiscal 2020 earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our second quarter fiscal year 2020 slides. It is now my pleasure to turn the call over to our CEO, Horacio Rozanski. We are now on Slide 5.

Thank you, Nick, and good morning everyone. Today, we have the pleasure of reporting another quarter of excellent operational and financial performance. Our second quarter numbers demonstrate once again, Booz Allen's institutional strength and our leading position in the market. September 30th marked the midpoint of our current fiscal year and of the three-year period of our investment thesis. Lloyd and I are extremely pleased with where we are at this point against both our plan for this year and the multi-year objectives we set 18 months ago. Today, we will summarize the firm's performance operationally and financially and discuss our expectations for the remainder of the year. As always, we will put it all in the context of our investment thesis. Let me start at the strategic level. As you know, over the past seven years, we have transformed our firm into one that is more technically capable, more innovative, and operating in more mission-critical areas. We are showing clients how to get value from technology adoption at a time when they have the need and the resources to do so. Our aim has been to capture rising demand that's driven by a fundamental shift from the hardware economy of the past to the software economy of today and the future. This is our Vision 2020 strategy. And as I have said before, Booz Allen is in the pay-off period. Disciplined execution of our strategy has created powerful differentiation in today's market and, equally important, it has created a position of strength for us as we lean into the future. We have the agility, talent, and investment capacity to evolve our firm to meet the emerging demands in the market; demands driven by things like the fast-changing tech stack and the dynamic global strategic environment. We believe our proven ability to operate at the intersection of consulting, technology, and mission, while also anticipating what clients will need next, can sustain the future growth of the firm and our consistent record of performance. This is at the core of our value proposition for all stakeholders; from employees, clients, and investors, all the way to the people who are served by the missions we have announced and the problems we solved. This position of strength in the market is also the foundation for our core investment thesis goal of increasing adjusted diluted earnings per share from about $2 in fiscal year 2018 to about $3.30 in fiscal year 2021. The performance we delivered in the second quarter shows we remain on track to achieve our goal. You'll recall that our plan for this fiscal year was to come out of the gates fast, executing a relatively aggressive first half and a more conservative second half. We set this plan in place last spring because of uncertainty about the federal budget. And while there has been progress in the budget and appropriations process, we are in the new government fiscal year and still not at the finish line. But our strong performance in the first half of our own fiscal year gives us confidence that we will end the year at or above our original guidance, for both revenue and adjusted diluted earnings per share. Turning specifically to the second quarter. The results we report today are exceptional. We achieved a double-digit increase in organic revenue growth with excellent profitability. We had another outstanding quarter for hiring, adding 600 people to our talent base, which brings us just shy of 27,000 total. Bookings were well diversified across our markets and seasonally strong as the government fiscal year ended, and as of September 30th, we set another record for backlog. As you know, we manage the firm as a single P&L. This fosters agility and collaboration, and allows us to channel resources towards the best opportunities. Through the first half of the fiscal year, growth in Defense & Civil, representing roughly three quarters of our business, is especially strong. In fact, it's ahead of our own expectation. The need for systems integration, digital transformation, and the insertion of new technologies in areas such as cyber, data analytics, and immersive technologies is fueling our continued success. Shifting to the intelligence market, demand is also strong, but revenue growth is somewhat constrained by the need to source and hire highly cleared talent. In global commercial, which represents 3% of our business, we'll probably be flat this year after three years of growth of about 25%. Still, over the medium term, we continue to see great potential for profitable growth in this market. In this time, leaders across our business are managing the business exceptionally well and capturing the right opportunities at the center of clients' missions. Our teams, spread across hundreds of clients and locations worldwide, are skillfully delivering high-quality services and solutions. They are helping transform organizations and advance innovation. On the strength of their performance in the first half, today, we're excited to announce increases in our fiscal year 2020 guidance for revenue, operating cash, and adjusted diluted earnings per share, as well as an off-cycle increase in our quarterly dividend. Before turning the call over to Lloyd to cover the financials, I want to touch briefly on one aspect of the final piece of our investment thesis, what we call option value. As you know, our firm has been focused in recent years on developing premier offerings in Artificial Intelligence. Because of the investments we have made, today, we have a robust AI services business across many civil, intelligence, and defense lines. We are proud to be helping organizations such as the Joint Artificial Intelligence Center and other parts of DoD overcome the hurdles in moving AI capabilities from the lab to the field. Warfighters are eager to operationalize AI in ways that will maximize efficiency, speed decision making, and improve command and control. We expect continued strong growth in demand as more and more federal agencies work to integrate AI into their missions. This rising demand, and our capacity to meet it, is boosting growth on the services side of our business. And we are also developing new AI business lines and exploring ways to monetize our intellectual property. This is option value, because these new approaches have the potential to augment our labor-based business model with new revenue models and enhance our financial performance beyond the goals set in our investment thesis. On this front, Booz Allen will hit a significant milestone next week. Because of our strong partnership, we will announce the limited release of an AI software platform at the NVIDIA GTC Conference next Monday. This is an early access prototype, with the expectation that our production product release is about 12 months away. We do not expect a significant number of paying clients for at least a year. Still, this is an exciting step towards providing secure in-mission access to AI solutions for our clients, and we're optimistic about the potential it holds to fuel Booz Allen's future growth. And with that, Lloyd, over to you for the full results of our quarter.

Thanks, Horacio. And good morning everyone. I'm excited to take you through the details of an excellent second quarter for Booz Allen. We came into the fiscal year planning for an aggressive first half, and that's exactly what we've delivered. Our ability to plan for potential market uncertainty and execute against a proven strategy gives us confidence that we'll deliver another fantastic year of growth. This confidence is reflected in our decision to increase the narrow full-year guidance for revenue and adjusted diluted earnings per share, and to increase full-year operating cash guidance. Let's go through the numbers. Please turn to Slide 6. Starting at the top line, revenue and revenue excluding billable expenses, both grew by 12.7% compared to the second quarter last year. The increases were primarily due to sustained client demand, three consecutive quarters of hiring and retaining phenomenal talent, and an extra workday compared to the prior year period. We believe our success and execution in hiring are supported by our unique market position and high-quality services. We are very pleased with the breadth and quality of the work we're winning, it's clear that demand for our solutions is diversified and that our strategy to be at the intersection of consulting, mission, and technology has made Booz Allen a valuable partner to an increasingly broad range of clients. Turning to Slide 7. Book-to-bill for the quarter was in line with historical performance at 2.68 times and our trailing 12-month figure is 1.22 times, both excellent outcomes supported by a strong award environment and robust proposal activity across all markets. Total backlog as of September 30th was $22.9 billion, 7.2% higher than the end of the prior year period and a new record high for our firm. Funded backlog at $4.4 billion increased by 4.8%. Unfunded backlog at $5.4 billion grew 12.3% and priced options increased 6.1% to $13.2 billion. Headcount, as of the end of the second quarter, was up by 1,640 or 6.5% year-over-year and, as Horacio said, by 600 since the end of June. Our success in hiring to date ensures that we can continue to execute on our backlog and meet our objectives for the second half of the year. Moving to the bottom line. Adjusted EBITDA for the second quarter was $192 million, up 17% compared with the same period last year. Adjusted EBITDA margin for the quarter was 10.5%, up 38 basis points year-over-year. Our margin performance continues to be driven by strong contract performance, efficient management of our business, and an ongoing shift towards higher-margin, technically focused work. We have become adept at translating industry-leading organic revenue growth into profit, even as we support our businesses and our people for the long term. As is our typical pattern, we do anticipate a lower margin in the second half than in the first due to seasonal increases in unallowable spending, the roughly flat growth in global commercial that Horacio mentioned, and other factors. That said, we believe we will finish the year with EBITDA margins in the low 10% range. Second quarter net income and adjusted net income grew by 23.3% and 17.9% to $114.3 million and $114.8 million respectively. The increases are primarily due to revenue growth and margin expansion. This translated to a $0.13 increase in second quarter adjusted diluted earnings per share to $0.81. Our weighted average diluted shares outstanding declined by 2.3 million shares compared to one year ago. Turning to cash. We generated $216 million in operating cash for the quarter, bringing our total first half operating cash generation to $267 million, roughly on par with where we were at the end of the first half last year. Additionally, due to the success we've had with the process improvements in the cash collection cycle, we anticipate strong cash conversion during the second half, which gives us confidence to increase our full-year operating cash guidance. Capital expenditures for the quarter were $33 million as we continue to invest in facilities, infrastructure, and technology. This includes new secure and retrofitted space and technology to support an increasingly technical workforce, new business lines, and continued growth outside the Washington Metro area. Please turn to Slide 8. Our strong operational and financial performance serves as the foundation for a patient, efficient capital allocation strategy that aims to deliver both near- and long-term value for our shareholders. Consistent with this approach, we returned $32 million to shareholders through dividends during the second quarter. We remain firmly committed to deploying our targeted $1.4 billion from fiscal year 2019 to 2021, in line with our investment thesis. Our capital deployment approach remains disciplined and our priorities unchanged. We continually evaluate all our options to ensure that we are maximizing the value of our capital for shareholders in the near, mid, and long term. This morning, the Company announced the authorization of a 17% off-cycle quarterly dividend increase of $0.04. The quarterly dividend of $0.27 per share is payable on December 2nd to stockholders of record on November 14th. This off-cycle increase reinforces our commitment to quarterly dividend growth as a component of our investment thesis. As you know, our normal annual dividend assessment occurs each January. And we expect to do that assessment as usual this fiscal year. As I mentioned at the beginning of my remarks, our exceptional first half performance combined with our record backlog and strong headcount growth support our decision to increase the narrow full-year guidance. Please turn to Slide 9. For fiscal year 2020, we now expect revenue growth to be between 9% and 11%, more than 2 to 4 percentage points above our original guidance due to the exceptional top-line performance and strong bookings in the first half. We also are raising and narrowing our full-year adjusted diluted earnings per share guidance given our strong revenue and margin performance to date. The new range is $3 per share to $3.10 per share for the full fiscal year. This revised range is based on a $137 million to a $141 million weighted average shares outstanding and a tax rate in the range of 23% to 25%. Finally, we have a $50 million increase in our guidance for operating cash. We now expect full-year operating cash to be between $450 million and $500 million. In closing, I'll reiterate that we are extremely pleased with our first half performance. We are executing exactly according to plan and we remain on a strong path. Heading into the second half of the fiscal year, the entire management team is excited about the success we continue to have and remains optimistic about meeting our multi-year financial goals. Nick, let's open the lines for questions.

Daniel, please open the lines.

Our first question comes from Joseph DeNardi with Stifel. Your line is now open.

Yeah, hey. Good morning.

Good morning.

Horacio, I think when you guys provided the longer-term targets 18 months ago, they were generally more bullish than folks were expecting and you've now shown kind of halfway through an ability to have kind of multi-year visibility into your business. I'm just wondering if you could talk about how that visibility looks over the next few years in the context of a less bullish budget environment. I mean, I think that's the main focus of investors now in terms of can you all sustain this level of growth that you've been delivering. Maybe just talk about that a little bit. Thank you.

Thank you for the question. We are optimistic about the market we operate in and particularly confident in our position within it. I have consistently stated that our focus isn't solely on the total budget size; rather, it's about our clients who are committed to advancing their missions, particularly through the integration of technology, and who possess the necessary means and resources. They do, and we anticipate this sentiment will persist in the future. We expect our unique strengths will continue to establish us as a leader in organic revenue growth and contribute positively to our bottom line through strong margins, as we have been doing. Given the current performance of our business and the drive of our team, we believe the outlook moving forward is quite promising.

Thank you. And then along those lines, I'm sure there was an assumption around bookings that was embedded in that three-year outlook. Can you just talk about, kind of halfway through, the extent to which bookings you've realized have been better than what you were expecting? Thanks for the questions.

Our booking environment is actually quite strong. As you saw, and as Lloyd mentioned, we have record backlog to report coming out of the first half of this fiscal year. I think, again, at the risk of being boring, we've been very consistent in saying that we don't feel we're demand constrained, that we feel that our continuing challenge is to find the right people with the right skills, to deploy them into clients as quickly as we can to fulfill the backlog that's available. And that we've been doing particularly well certainly this fiscal year and we expect that to continue. So, it's a good picture and, again, we believe that we can operate in this market with quite a bit of confidence, which is why despite some of the current budget scenarios we have raised and narrowed guidance. We declare the $0.04 increase on our dividend off-cycle, our headcount is up 6.5% in the first half, just six months ago we increased the back-end numbers for our investment thesis projection. I think these are all signs of confidence in the market and our capacity to succeed in this market.

Thank you.

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

Hey, good morning everyone. Thank you for the time. And these results are never boring, Horacio. So, you're all good.

Well, these are your headlines, Sheila.

Here’s my first question about the growth in headcount. It's quite impressive, but there remains a significant gap between that and revenue growth. How should we interpret this? Is it due to an increased scope of contracts or just a timing issue that will improve in the second half? Can you provide some insight on this?

Sure. Historically, if we are growing our headcount as planned, both sourcing and deploying the talent, there is a delay in getting those folks deployed and the conversion of what's in our backlog. So, as a rule of thumb, it typically is a few percentage points higher than what we see in terms of our headcount growth percentage, but historically, it's never been a one-to-one.

Okay, thanks. And then just maybe longer term, Horacio, you mentioned the AI adoption and just accelerating processes on that you don't expect any paying clients in the next year, but how do we think about that overall market size, the adoption of it, how quickly do you expect it? Can you just quantify it a little bit more, add a little bit of color on customers that you think are attainable?

So, let me give you some color. We think about AI as both a key component of our traditional business, our labor-based business, and as a huge option-value opportunity for the future. And we're seeing success on both of them. In the prepared remarks, I talked about our work at the Joint Artificial Intelligence Center. But that is one of the many places where we are working with clients to figure out how to both create AI solutions, but most importantly, take them to the field. A few months ago, we talked about a win at HHS on AI. This is a broad-based demand increase that we see across most of our clients who are looking to use these technologies to improve mission effectiveness in intelligence, in operational intelligence for the military, and in anything that has a big data component, which at this point is a part of our federal government. And we're seeing the near-term upside of that in our labor-based business. In parallel with that, we've been looking for different ways to monetize our intellectual capital and to take advantage of the fact that we know both these missions and what the mission needs are beyond what is purely labor-based, and this is what this software platform that we'll announce in more detail on Monday does as it gives our clients access to train models in a way that is in mission, that is secure, that they can actually bring to bear in different ways. That's the piece that has more of a longer-term tail to it. We're still in the pre-release limited access period, where we're working with a few clients to test the proposition, to improve the proposition, to advance it. And about a year from now, we'll go into more of a full-production mode and then we'll begin to see, hopefully, revenues come from that. That's the path we want to be on. But you don't fit inside of these option value portfolio, which isn't one thing, it's a number of things. And at the right time, we'll come back and talk about what that whole group of initiatives looks like and what the potential financials for them are. It's premature to do that now, but it's certainly in our sights.

Thank you. Thanks a lot.

Sure.

Thank you. And our next question comes from Cai von Rumohr with Cowen & Company. Your line is now open.

Terrific, thank you very much. So, your bookings this quarter benefited from the $1 billion VA ITOPS task order protest that cleared. Could you give us some color in terms of how much do you have in protest of your take-away wins, and roughly how much are you protesting contracts that may have been taken away from you?

In terms of protest, the environment is heavily protested. That being said, we have a minimal amount tied up in protest, and conversely, we are also facing a minimal amount of protest ourselves.

Okay. And then you continue to look for a $1 billion foreign capital deployment. That looks to me like you've got to spend close to $700 million between now and the end of fiscal '21 on share repurchase or M&A. You didn't buy that much stock in the first half and your stock prices continued to go up. So, how should I think about the priorities you're setting on those two options?

Yeah, I mean, we are committed to returning the $1.4 billion through FY '21 and continue to look at all options; share repurchases, tuck-in M&A, our regular recurring dividend as Horacio mentioned, the fact that we did an off-cycle increase of $0.04 is in alignment with that, and the possibility of a special. But bottom line is, we remain patient, we're going to remain disciplined, we're always looking for what and how to maximize the value for our shareholders in the near, mid and long term, and we're in a great position. If you look at our operating performance and the strength of our balance sheet, which we've been working on for a number of years to make as strong as possible, we feel that being patient and being disciplined is ultimately going to return the $1.4 billion.

Thank you very much.

Thank you. Our next question comes from Jon Raviv with Citi. Your line is now open.

Hey, thanks, good morning. Maybe I'll just follow along there for a moment. The $1.4 billion you said 18 months ago was based on a certain set of numbers over three years. Clearly, those numbers are higher. So, directly asking, why just $1.4 billion higher?

We've never straight-lined our projections. When we put forward the investment thesis, it really was to emphasize the growth in adjusted diluted earnings per share over three years, as well as the top-line growth of 6% to 9%. We felt that providing more color around our capital deployment target, that would be good. And as we have also demonstrated in the past, where we see the need to make an adjustment, we'll make that adjustment. So we're not ruling out that it could be or not, but we do feel it's important to stay in alignment with the plan that we have, which we're very excited about this year.

Thank you for that insight, Lloyd. When you refer to tuck-in M&A, I grasp the strategic implications, but could you clarify what that means in terms of size? Is there a specific threshold for what you would consider a tuck-in acquisition?

Not really. I mean, we have always sort of reacted to what's the market making available to us, what are the broader financial implications of any particular deal. As I mentioned earlier, we're patient and disciplined. We look at over 100 opportunities every year, and given the strength of our organic growth, we don't need to buy revenue. And so, it is very much one of the levers that is at our disposal, just not one to date that we've pulled a lot.

Thanks very much.

Thank you. Our next question comes from Gavin Parsons with Goldman Sachs. Your line is now open.

Hey, good morning.

Good morning.

I wanted to ask you about just the growth and margin dynamics. Typically, with new contracts coming at a lower margin, faster growth often results in dilution. So can you talk about maybe whether anything has structurally changed, and if you could approach that from maybe a Booz-specific perspective but also from a customer standpoint. Thanks.

Sure. I guess I'll start and then I'm sure Lloyd is jumping in a bit throughout.

Jumping.

The dynamic for us is, our work through Vision 2020 has become increasingly more technical and increasingly more differentiated. And so we're onboarding work that is at the center of our clients' missions, that is at the center of inserting technology into those missions in a different way, and that affords us actually in many cases better margins, if not worse margins than what we have before. That was what we signed up to do through the investment thesis and that's I think what we've seen. That's why margins are up significantly. Frankly, ahead of our own expectations. If you go back 18 months ago what we thought we would do and what we're doing, we're better. I don't know that I can comment on how the rest of the industry behaves. In large part, we've talked in the past about the fact that this industry was bifurcating and that we were looking to occupy this place of differentiation where clients need quality, where quality really matters, and where high-quality and high-impact missions get rewarded. And I think that's where we are. It allows us to enter this virtuous circle. Because of that, we can invest in new capabilities, we can invest in looking for and retaining the best people in this market, and it then in turn affords us the opportunity to continue to stay ahead.

So I would just add to that. The 10.5 in Q2, we're ahead of where we were last year and 10.7 for the first half of this year. I think it really points to a couple of things. Certainly, what Horacio mentioned in terms of higher-margin, technically focused work being at the center of our clients' mission. And it's working. There is a dynamic that when you look at the percent of our cost-plus increasing, that margin impact, which is typically a little bit lower, has really been offset by our just strong execution on fixed price and time and materials work. And we have been on a mission to operate increasingly at a higher and higher level, and our team and our people have done just that.

That's great color. And then, Horacio, you talked about the shift to the software economy. Can you talk about how that expands your addressable market? I mean, for example, your approach to the soldier as a platform wouldn't have been possible previously. So, how does that open up new budget areas for you that had maybe previously been reserved for hardware? Thanks.

That's a great question. If you look at the car industry, the vehicle I learned to drive had no lines of code, maybe just a few wires. The car I drive now is essentially software-driven. This shift is happening in defense and intelligence as well, where software is becoming a key source of value creation across various domains like space, ground, and underwater. Consequently, protecting that software and focusing on cybersecurity is increasingly important—not just for networks, but also for platforms. Analytics fundamentally alters how intelligence is gathered and shared, which in turn transforms warfighting capabilities. At AUSA, we showcased creating data fabrics that enable various components, regardless of their origin, to communicate, allowing soldiers equipped with visors to access essential information from satellites, drones, and analysts in one location. We are uniquely positioned to develop such solutions and to build open architectures at the edge, removing constraints within the environment. This approach is why we believe we are already succeeding; it represents the payoff for Vision 2020 as we progress into the future. While I’m speaking specifically about defense and intelligence, I could elaborate on our developments in fraud detection for the Treasury, the value of data throughout the government health sector, and the significance of law enforcement efforts. We have been preparing for this market, which is now emerging, and we aim to seize as many opportunities as possible.

Thank you.

Thank you. Our next question comes from Carter Copeland with Melius Research. Your line is now open.

Hey, good morning, gents.

Good morning, Carter.

So, I was going to tease you for another conference call after a holiday, but then you delivered a treat on Halloween. So, I'll tell you just keep doing what you're doing.

Well, it would have been worse yesterday because all of us had match plans; would have been a lot more tired. So...

Yeah, yeah. I guess it worked out that way, but you did the Super Bowl and that was hard on Lloyd. So, just keep doing what you're doing.

Thank you.

I have a couple of questions. First, I'm curious if you can provide any details about the strong civil growth we've seen year-to-date. You mentioned some factors related to law enforcement, Treasury, and the health enterprise in your previous response, but I’d like to know if there are specific agencies contributing to this strength. Secondly, regarding the flat growth in the commercial sector, is this just typical fluctuation, or are there specific geographic factors or significant contracts that impacted the results there? Thank you.

Sure. Let me do the last one first, because otherwise I'll forget. In our global commercial business, we had a few contracts that wound down and that's what's driving the numbers this year. If you remember, back a couple of calls ago when we reported 32% annual growth in commercial, I, to be consistent, answered the same way. On the other side, which is a business of that size and of that maturity, a couple of contract going one way or the other; well, as you called it, lumpiness will drive the short-term performance, but the long-term drivers of that business, especially, our work in cyber remain very strong. We believe we're differentiated, and we're confident that it will continue to be accretive to our overall portfolio. On the civil side, that is the business that has done well for quite some time. The anchor player for that business has been our health business, which we talked about in some detail on Investor Day, as you'll remember, and which has been growing very well and continues to do so. Cai asked the question about ITOPS. That's again the type of win. It's not just the size of the business and the growth rate inside of it; it's that the business has really moved to the intersection of technology and mission. And whether it is cyber protection of a major health agency, whether it is our ability to do agile development at scale, whether it is helping them do fraud detection in a different way and now beginning to implement AI and process automation; those are all the drivers of growth. If you look at this year, again, health is growing very strongly; what we call our FED business, which is really Treasury and the associated agencies, is having a banner year; and our law enforcement and transportation business is also doing very well, which is why you get to the strong double-digit performance, which again, it's exciting in its own right, but it's the underlying drivers of it that have me excited and optimistic.

Great, thanks for the color.

Sure.

Thank you. Our next question comes from Edward Caso with Wells Fargo. Your line is now open.

Hi, good morning, congrats here. I'm a little curious as the market shifting more towards tech and solutions, is there a change in philosophy in dollars deployed around innovation? And also, if you could talk about your CapEx budget, the trends, and what the forecast is for this year?

We are continuing with our approach that started in 2012 when we established the strategic innovation group. This involves proactively engaging with new technologies to better understand them, forging partnerships with external players, especially in Silicon Valley, and bringing that knowledge to our clients. This area is in high demand and we plan to keep focusing on it. Our success has enabled us to expand into new areas beyond what we initially discussed in 2012, including 5G and later communications, among other topics that we will address in greater detail at the appropriate time. This remains a fundamental part of our strategy, whether through IRI or by deploying experienced professionals to grasp these technologies and better serve our clients.

And on the CapEx side of it, our CapEx expenditures are really aimed at continuing to support the growth we've been experiencing and to become more tactical. Just as a context we've been improving our facilities that allow us to source and bring on board the talent we want, allowing us to work in a manner that's more collaborative and innovative, and then infrastructurally really upgrade many of our IT systems, including Human Capital Financial, will be consistent with that. We're likely to be around $120 million; that is at a level that we think will be consistent with the objectives around our capital expenditures.

My other question is around the continuing resolution or they're already talking of extending it beyond November 21 at some point, does that change your outlook if we roll on into next year with a continuing resolution or fill continuing resolution. And then I guess that the flip question which is, if they miraculously get it done on November 21, would you be more bullish about your second half? Thank you.

I'll start. We're very excited to raise our guidance this fiscal year and at the very beginning of this year, you'll recall we forecasted that we wanted to come out of the gates very strong aggressively. We did; that was the right decision. At the same time, we said it was prudent to plan for some uncertainty in the back half. So we had a more conservative approach. So we've already taken into account as indicated at the beginning of the year and then with the raise in guidance, we believe that demonstrates our confidence this year. So the broader end of your question, we're going to address that when we get to a logical point this year. We're just not at that point, we're very excited about where we are in mid-year and we believe that the raising and narrowing of our ranges is indicative of that.

Thank you. Our next question comes from Robert Spingarn with Credit Suisse. Your line is now open.

Good morning. So excellent quarter Horacio I wanted to dig into AI a little bit and I wanted to ask if you could be a bit more specific in terms of what you're actually referring to. Are we talking about, I guess, machine learning, computer vision? It just seems like a term that could be unpacked a little bit, and then maybe you could tie that into what you're going to be announcing within at the NVIDIA conference to the extent that you can talk about that. And then I have a question for Lloyd on margins.

We are concentrating on all aspects of making artificial intelligence operational within missions. This begins with developing the right infrastructure to deploy algorithms effectively. If intelligence analysts must step outside their usual workflow to utilize a new tool that may still be untested or imperfect, the likelihood of adopting that tool decreases significantly. Conversely, if the technology can be integrated into their workflow, adoption is much more likely. In dynamic environments where communication access is limited, we focus on creating the necessary infrastructure to deploy technology at the edge. Additionally, we are involved in developing both the platforms and algorithms to enhance mission sets. The final critical aspect is fielding these technologies and collaborating with operators to ensure the algorithms are trained effectively. Since this is dynamic technology, it must be trained where it will have the most impact for full deployment. We are addressing this entire process with several clients who are at the forefront. Regarding the announcement on Monday, I encourage you to tune in for more information then.

Okay, and then Lloyd, we talked a lot about the margin momentum that's coming from mix. Today, we talked about the software economy. I guess tied to what we just talked about a moment ago. Are there also efficiencies dropping through? Or is that just not really the focus point here for margin expansion, just and what I think about is a variable cost business also with the tight labor market. So is it really simply a mix-driven margin expansion?

No, I mean you're right, I mean we have been focused on operating as strongly as we can, it's what we're experiencing now, which we also began to experience last fiscal year. As all of our change efforts to operate better and better are kicking in. And so, yes, for sure, there is the mix part of the business and what we do as Horacio has talked about. But our business right now is operating very strongly.

Okay, thank you.

Thank you. Our next question comes from Tobey Sommer with SunTrust. Your line is now open.

Thank you. Could you provide some insights into your commercial business? I appreciate your comments on AI. Thank you.

Our global commercial business is about 30% of total revenue. As you know, it has two significant components, one here in the US, one more focused in the Middle East and North Africa region. The core of that business, on the core of our strength, is taking our cyber expertise and know-how and deploying that to help especially private sector clients address the near and longer-term issues that they face. Unfortunately, that is the business that has seen rising demand, and I say importantly because it's driven by the threat in the environment, which continue to increase and it's driven by adversaries who are more and more sophisticated. So the people that our clients need helping that need to be equally increasingly sophisticated and Booz Allen, I believe it's at the top tier of that stack. And so that's the business that we're building work continuously evolving it. We're looking for places where cyber intersects with all the technologies like 5G, like AI, like everything else, and I think that is going to be the continued source of differentiation for us?

Could you expand what performance was like in the quarter and then also maybe touch on in your headcount growth. Is there anything meaningful difference in the pace of headcount growth, or sort of junior staff out of school versus more senior lateral hires? Thanks.

We are very pleased with the performance in the first half across the entire business, as well as with hiring and retention during that period. Our team has executed our playbook effectively, which was designed to proactively address potential uncertainties regarding the federal budget by hiring aggressively in the first half and employing many people. This strategy provides us the flexibility to navigate the second half as the environment changes, while also fulfilling our initial commitments for the year related to narrowing and raising.

I would just add that we have probably four generations of folks at Booz Allen, certainly at the more junior level. Our summer internship programs, the changes that we've made there have really improved the yield of the candidates we see, but we have a tremendous effort and always well with sourcing and hiring at more senior levels driven by the requirements and needs of our clients. At more senior levels we also have an active recruitment underway, just given their understanding of the various markets and the decision-makers in the relationships they have.

Thank you. Our next question comes from Matt Akers with Barclays. Your line is now open.

Hey, good morning guys. Thanks for the question.

Good morning.

I wanted to touch on cloud briefly. So kind of with the JEDI moving forward, I mean, number one, when could that open up opportunities for you guys to build more stuff on top of the cloud? And then kind of on the flip side, are you seeing any indications that like the Amazons and the Microsofts of the world could use this to compete more directly with your business? like, are they hiring or competing for cleared personnel, for example?

Let me answer the question holistically, which is cloud adoption is one of the major trends across that federal government, not in DoD. We expect that to accelerate, and I think these contract vehicles are in some ways catching up to that demand as opposed to sort of being ahead of it. We work closely with all of the major cloud providers because what they do we cannot do and vice versa. What we do is unique and differentiated and it allows cloud to be deployed into mission in a way that is successful and effective. And we believe that at least for the medium term, those are the positions in the value chain that we and they we will occupy. So we're bullish about the ability, again a lot of what we talked about, we spend a lot of time talking about AI on this call. You need a robust modern cloud infrastructure to deploy those kinds of capabilities. So we see how the strong cloud adoption across the government benefits Booz Allen and it's another proof point on why we feel we're in the right place in the market at the right time.

Got it, thanks. And then I guess just going back to the long-term guidance, I mean the 5 to 6% adjusted diluted earnings per share growth you're already kind of in the low threes this year feels kind of conservative, how do you guys feel about that and could we get an update to that in the near future?

Yeah, I mean we're very excited about our performance to date and we never have straight lined our performance. But we have adjusted as it makes sense halfway through this year, which is tracking exactly as we had planned; we've raised and narrowed our guidance and we're on track for another very strong year. As we get closer to the end of this year, we'll assess and update if we feel that there are any other metrics that need to be adjusted.

Okay, thanks guys.

Thank you. Our next question comes from Sean Christopher Meakim with JPMorgan. Your line is now open.

Okay, thanks very much and good morning what I wanted to ask a little bit about the contract types and I definitely appreciate that it's not contract type that dictates profitability but the fixed price was kind of flattish year-on-year in the first half and up only kind of mid-single digits on a two year basis. So what kind of accounts for the mix shift in contract types as this growth has accelerated?

It's fundamentally driven by the markets in the clients we support as well as their preference as to what contract site they would like to engage Booz Allen. The increase in cost-plus is really driven by our defense market, it's been growing fantastically; that is the contract site that they typically turn toward and we've been responding appropriately. As it relates to the fixed price, we typically see that in our billion market and obviously in our commercial markets. We have a very conservative approach to the federal fixed price contracts. And so, I don't think there is really anything to read into it other than we're responding to our clients based upon their needs.

Okay, thanks. And then as a follow-up, as you think about sort of moving to your next set of targets and capital deployment, do you still think of yield as kind of the right metric to look at, if you saw the dividend increase today, if we saw another dividend increase early next year, it could still be kind of below the 2%, which is kind of a high-class problem to have because it's the increase in the stock prices that's driving it. But as you think longer term is yields kind of the right target for your cash return strategy?

Yeah, I mean when we put out our investment thesis originally the 2% was really over time. So we think we are deploying our capital in a prudent patient disciplined way. We're pulling the levers that I mentioned earlier in the call. We feel that this is one that really, to your point is a somewhat of a high-class problem. But really speaks to the confidence that we have in our business and the returns that we can provide to our shareholders.

Okay, thank you very much.

Thank you. Our next question comes from Louis DePalma with William Blair. Your line is now open.

Good morning Horacio, Lloyd and Nick. Cybersecurity, commercial and 5G wireless networks is a big theme right now since those networks are currently at the peak days of build out in the US and around the world. Is that a new growth driver for you or is the government leaving protection for those networks up to the wireless carriers themselves?

I wouldn't put it off a single thing that we're focused on, but rather as again part of this overall trend where technology is accelerating where these platforms are changing rapidly and we're securing these platforms is becoming essential is broadly based and broadly known. The theft of intellectual property that our clients are dealing with is at an all-time high and is driven by adversaries who are becoming more and more sophisticated. So the people that our clients need helping that need to be equally increasingly sophisticated, and Booz Allen, I believe is at the top tier of that stack. And so that's the business that we're building. We're continuously evolving it. We're looking for places where cybersecurity intersects with all the technologies like 5G, like AI, like everything else, and I think that is going to be the continued source of differentiation for us.

Okay. So it's not disproportionate above, and in the other types of platforms that you're protecting?

Not at the moment.

Got you. And one final one. I'm digging deeper into your 12% top line growth roughly how much of that growth is coming from like price inflation from your existing contracts as your existing contracts increase in scope versus new work that you're winning?

Probably be a challenge getting you that specifically, but our win rate in Q2 was 62% for new work and 85% for recompete, and that is up from the beginning of the year. And so that coupled with how we typically price proposals with rate increases high to our more focus for taking into account pricing as we see it at the time when we make submission. So at this level, of my level I am very excited about our win rate performance and the top-line growth that’s been able to generate.

Okay, Lloyd, and when you’re renewing contracts, is there a general price inflation upon that renewal?

You know, it varies based upon the circumstances, we obviously take that into account as we’re putting our pricing submissions and the government has been receptive to that.

Sounds good. Thanks.

Welcome.

Thank you. Ladies and gentlemen, that concludes today’s Q&A. I’ll now turn it back to Horacio for closing remarks.

Thank you. And thanks everyone. This has been a very robust Q&A session. To close this morning on a different note, I’d like to shift gears and call attention to something that we at Booz Allen are very proud of. Because earlier this month at a special event, we celebrated the 20th anniversary of GLobe, our internal business resource group for LGBTQ colleagues and allies. It's easy to forget, given the significant strides towards equality that our country has made in the past decade, how rare it was in the late 1990s for companies to provide benefits to domestic partners or to establish an affinity group for employees and allies. But that is exactly what Booz Allen did. And since then we've consistently built on our record to support diversity, which is why our firm has scored a hundred on the Human Rights Campaign Corporate Equality Index since 2010. Our commitment to having every person on our firm come to work as their true authentic selves matters. It matters a great deal. It matters to those we are recruiting, those who are new to Booz Allen and those who have been here since the earliest days. And it's also one of the most powerful demonstrations of purpose and our values. We firmly believe that the record of success for this institution comes down to people, to purpose, and to passion. We take care of our people. We empower them to be their best selves and reach their full potential. That’s where our focus was years ago when a courageous group of colleagues founded Globe and it's absolutely where our focus will remain. So I didn’t want to let this anniversary pass without publicly acknowledging that Globe members and all dimensions of our diversity are central to who we are and critical to our continued success. And on that note, thanks again, for being with us on the call and have a great day.

Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.