Booz Allen Hamilton Holding Corp Q4 FY2023 Earnings Call

Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's Earnings Call covering Fourth Quarter Fiscal Year 2023 Results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I'd now like to turn the call over to Mr. Nathan Rutledge. Thank you. Good morning and thank you for joining us for Booz Allen's fourth quarter and full fiscal year 2023 earnings call. We hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on slide two. With me today to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Matt Calderone, our Executive Vice President and Chief Financial Officer. As shown on the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning are forward-looking, and may relate to future events or future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter and full fiscal year 2023 earnings release and slides. It is now my pleasure to turn the call over to our CEO and President, Horacio Rozanski. We are now on slide four.

Thank you, Nathan, and good morning, everyone. Thank you for joining the call. Matt and I are pleased to share excellent financial results for fiscal year 2023. Every day the people of Booz Allen bring their best to our clients' most critical missions. Their hard work and dedication continue to produce outstanding outcomes. Over the past year, we have strengthened our momentum and continued to deliver industry-leading organic revenue growth. Today, Matt and I will discuss the full year results and our fiscal year 2024 guidance in the context of our investment thesis. I will also share an update on the leadership dimension of our VoLT growth strategy and describe our priorities for the year ahead. Let's begin with fiscal year 2023, another outstanding year for Booz Allen. Our performance puts us on track to deliver on our investment thesis which we first discussed with analysts in October of 2021. Our investment thesis targets growing adjusted EBITDA to $1.2 billion to $1.3 billion by fiscal year 2025. We expect to accomplish this goal through the following levers, industry-leading organic revenue growth in the range of 5% to 8% annually, adjusted EBITDA margins in the mid-10s. We continued investment for future growth and $3.5 billion to $4.5 billion in total capital deployment that prioritizes small-to-mid-size strategic acquisitions. At this point, organic growth and profit are above our forecasted ranges and inorganic contribution is somewhat behind base. When put together, we are on track with excellent momentum and optionality as we move into our second year in the planning horizon. Diving deeper into the full FY'23 results, it is clear our leaders are doing an excellent job on hiring, selling, and the cost management priorities we outlined last May. Total revenue grew 10.7% fueled by a record selling 10.6% client staff headcount growth. Our total backlog grew 6.7% to $31.2 billion bolstered by wins that insert leading-edge technology into priority mission areas. We are growing efficiently in a challenging inflationary environment and delivered $1.014 billion in adjusted EBITDA, with an 11% adjusted EBITDA margin. We also completed the acquisition of EverWatch last October and began integrating it into our portfolio. This morning, I also want to update you on our settlement discussions with the Department of Justice or DOJ over its civil investigation into highly technical elements of our cost accounting and indirect cost charging practices with the US government over the period from 2011 to 2021. As a reminder, on May 12th, 2021, the DOJ notified us that it had closed its criminal investigation with no further action. Regarding the civil matter, we are limited in what we can say as we are in active settlement discussions with the DOJ. We reserved an additional $226 million in the fourth quarter of fiscal year 2023. We also disclosed that the range of reasonably possible loss in connection with the investigation is between $350 million and $378 million, inclusive of the amount recorded in our financial statements. Since we have always believed that we acted lawfully and responsibly, we would not admit any wrongdoing. Booz Allen cooperated with the DOJ inquiry since first learning about it nearly six years ago. If we do settle, we would avoid the delay, uncertainty, and expense of protracted litigation into an immensely complex cost accounting matter. Now let me shift to VoLT. Our strategy to accelerate growth by rapidly bringing innovation to national priority missions. Having described the V and the T in prior earnings calls, today I will discuss the L or leadership dimension of VoLT. In this context, leadership is about being first to build scale positions that solve challenges at the mission and technology intersection. It's leading by correctly anticipating the decisive moment that fundamentally transforms missions and creates extraordinary growth opportunities. Today our nation is at a historic inflection point. Instability in the geopolitical environment and the rapidly accelerating pace of technological change are converging. This creates complex interconnected mission challenges. Two top priorities are the pacing threat of China and the rise of artificial intelligence or AI. As our country faces these realities, Booz Allen is prepared to lead in our industry and beyond. Let me begin with China. For over two decades, we have been expanding our presence in the Indo-Pacific region in support of Defense and Intelligence missions. Today, our team in Hawaii has grown to over 300 professionals and our cutting-edge Honolulu office includes an Innovation Lab where we co-create solutions with clients. We have an additional 200 employees positioned across the entire INDOPACOM region. As our clients' priorities and resources increasingly shift to the Pacific, we are already established in the geography and prepared to support our clients' growing efforts. Given the strategic importance of the mission to counter China, earlier this year, our entire Booz Allen leadership team was on the ground in Hawaii. We engaged with senior defense clients and community leaders to discuss the full range of opportunity and need. I came away with a renewed sense of urgency to invest and position our best technology capabilities in the region. I see an opportunity to lead by rapidly providing our clients with scaled solutions that integrate multi-domain technology and critical infrastructure protection across all of our work. This connects to our leadership position on the second priority, artificial intelligence or AI, where we have been investing for years in anticipation of the historic disruption we are now seeing. We are the largest single provider of AI services to the federal government and we were recently recognized by Frost & Sullivan as a growth and innovation leader in AI. Booz Allen has four primary differentiators that enable us to take Trusted AI Solutions from the lab to the mission at scale. First of all, our world-class talent. Our team of experienced AI, ML, and data practitioners is scaling to meet demand, growing by over 20% in fiscal year 2023. We're also training experts in adjacent disciplines to ensure AI is infused into all of our work. Second, our large and growing portfolio of contracts. This includes two of the largest AI contracts in the history of DoD, and beyond our AI center portfolio, many of our largest mission contracts have AI in scope. For example, we are pleased to announce that we recently won the $919 million EDITS task order. Through this work, Booz Allen will insert new technologies to help enhance the capabilities available to the Warfighter in all environments in combat situations. Third, our innovation engine. Our proprietary AI software factory known as AI-Assemble offers reliable reusable solutions that can be quickly tailored for the mission. And more broadly, Booz Allen has been piloting and experimenting with generative AI for years, well ahead of its jump into popular consciousness. And finally, our robust ecosystem of innovation partners provides access to the latest developments across the entire tech stack. AI has been a primary focus of our corporate venture fund and we're pleased with the progress we are seeing. Our position as a leader is one of both insight and responsibility. That is why we have been working for years on an ethical AI framework that quantifies risks and supports measurable responsible AI models. Our recent investment in Credo AI augments our capability. Our nation is facing unprecedented threats and challenges. In this environment, we are proud to deliver AI innovation across all the missions we support. And we see significant opportunities ahead, especially as we look to integrate artificial intelligence with other key technology areas, such as our extensive cyber and digital transformation capabilities. Let's shift now to fiscal year 2024. I want to provide the strategic context for the detailed guidance Matt will outline later in this call. We have ongoing momentum entering fiscal year 2024. Our headcount growth, strong demand, and funding for client priorities enable acceleration into the first half of the fiscal year. Conversely, we are planning for challenging external dynamics in the second half of the year. The ongoing debt ceiling and budget negotiations create uncertainty for our clients and we recognize that a timely budget for the next government fiscal year is likely out of reach. This lack of clarity and volatility around funding can often delay decision-making and contract awards. Therefore, our fiscal year 2024 guidance reflects both our incoming momentum and a range of funding scenarios for the next budget cycle. When taken together, we expect adjusted EBITDA between $1.075 billion and $1.105 billion, supported by strong revenue growth between 7% and 11%. This guidance sustains our commitment to deliver on our FY'25 investment thesis goals, and Matt will cover both our results and guidance in much more depth. Before handing off to Matt, I'd like to describe four priorities for the year ahead. These support achieving our multi-year financial objectives and align to those factors we can control. First, we must focus on aggressively capturing and starting work before September 30th. This is particularly important in our Intelligence accounts where we are seeing higher-than-anticipated contract turnover. Second, we must continue to run our business tightly, evolving our operating model to support fast growth and create capacity for continued investments. Third, we will continue implementing VoLT, looking for opportunities to accelerate our growth in new or evolving priority areas such as space and climate. And fourth, we remain committed to deploying capital in a way that maximizes shareholder value. Our focus remains small to mid-sized acquisitions as a strategic accelerator to our VoLT objectives. In closing, as we begin fiscal year 2024, I am very proud of everything our people accomplished in this past year. Booz Allen is nearing 32,000 professionals who bring their all in support of our clients and our institution, it is through their passion and talent that we continue to deliver industry-leading organic growth, and have strong momentum strategically and operationally. The challenges facing our nation are immense and Booz Allen's purpose and values inspire and drive us to innovate and find solutions. This gives me optimism about the future. I am confident in what we can do to help lead the way to a better tomorrow. And now Matt over to you to take us through the full financial results.

Thank you, Horacio, and good morning, everyone. I too am very pleased with our operating and financial results. We had a strong fourth quarter, closing out an excellent fiscal year 2023 at both the top and the bottom lines. The momentum we built on both the supply side and the demand side positions us well for the future as you will see in our fiscal year 2024 guidance. Booz Allen continues to produce industry-leading organic growth. Our margins are underpinned by the quality of our offerings and the strength of our execution. We are augmenting and accelerating our organic performance with a patient and disciplined capital deployment approach, and as a result, we remain on track to deliver on our multi-year investment thesis. I have a lot to cover today, so I will start by hitting the highlights of our fourth quarter performance then turn to our fiscal year 2023 results and finally close with our fiscal year 2024 guidance. Our fourth-quarter results were in line with our expectations as we finished the fiscal year strong while investing in the talent and the capabilities to drive future growth. In the fourth quarter, we delivered overall revenue growth of 8.7% year-over-year and organic revenue growth of 7.7%. This performance was driven by continued headcount growth, a solid book-to-bill ratio of 1.47 times, and client staff utilization that declined in the fourth quarter but is in line with our current growth posture. Adjusted EBITDA for the quarter grew to $231 million, an increase of 13% year-over-year. This was a function of our overall growth, strong contract-level performance, and continued efforts to operate more efficiently. This translated to us generating $1.01 in adjusted diluted earnings per share for the quarter, a growth of 17% year-over-year. In the quarter, we returned $191 million of capital to investors, primarily through a combination of dividends and share repurchases. And finally, we added over 800 net client staff in the quarter, a Q4 record due to strong hiring and seasonally low attrition. Now please turn to slide six, as I discuss our full fiscal year 2023 results. Total revenue for fiscal year 2023 grew 10.7% year-over-year to approximately $9.3 billion exceeding the top end of our guidance. Organic revenue growth was 9% year-over-year. And revenue excluding billable expenses grew 9.5% to approximately $6.5 billion. Our growth in fiscal year 2023 was broad-based. In Defense, revenue grew approximately 7% year-over-year. We are expanding our work at the core of national defense priorities, leveraging emerging technologies such as those Horacio described to transform missions and provide our Warfighters with decision advantage. Hiring remains a focus for our defense leaders, as their success to date has allowed us to ramp up new work and convert backlog. This business continues to accelerate. In Civil, revenue grew by approximately 19% year-over-year. This growth was particularly strong in our health and citizen services accounts and across our cyber and digital services offerings. We continue to see growth in our civil markets with a healthy proposal pipeline and the talent needed to convert on existing backlog. In Intelligence, revenue grew by approximately 7% year-over-year. This business delivered flat revenue growth in the fourth quarter due to tough year-over-year comparisons in billable expenses and cost recovery on certain contracts. We expect modest growth in the first quarter of fiscal year 2024, but this will taper during the year as our Intelligence business has seen higher-than-anticipated contract turnover. Our intel market leaders are focused on realizing the full value of the EverWatch transaction and repositioning our work against critical defense intelligence, national intelligence, and cyber missions. And finally, our global commercial revenue increased approximately 6% year-over-year. Our work providing critical cyber and incident response services to commercial clients and its connection to our government cyber mission remains a small but strategically important part of our overall portfolio. On the labor supply side, we ended the fiscal year with approximately 29,000 client staff, an increase of 10.6% year-over-year. Total headcount, inclusive of corporate staff, increased only 8.9% reflecting our ongoing focus on managing the business more efficiently. We continue to see both hiring momentum and significantly lower attrition rates compared to prior years. On the demand side, our strong backlog of work and a robust proposal pipeline provide good near-term visibility. We ended fiscal year 2023 with a trailing 12-month book-to-bill ratio of 1.18 times. Our total backlog was $31.2 billion, up approximately 6.7% year-over-year. Funded backlog grew 24.5% to $4.6 billion, unfunded backlog fell 4.1% to $9.5 billion and priced options grew 9.3% to $17.1 billion. Looking forward, our qualified pipeline of $46 billion is up approximately 14% compared to this time last year. With the current year budget in place, we are leaning into this pipeline to win as much work as possible and to get it on contract in advance of the coming budget negotiations. At the bottom line, we earned $1.014 billion in adjusted EBITDA in fiscal year 2023, finishing at the high end of our guidance range. This is a year-over-year increase of 8.4%. Our adjusted EBITDA margin of 11% was in line with our expectations and our guided range. Our net income decreased 41.9% year-over-year to $271 million. This was primarily a result of the $350 million legal reserve we recorded in connection with the ongoing DOJ matter in fiscal year 2023. Adjusted net income, which excludes this reserve, was up approximately 6.5% year-over-year to $605 million. Diluted earnings per share decreased 41% year-over-year to $2.03, primarily as a result of the aforementioned legal reserve. Excluding this reserve, adjusted diluted earnings per share or ADEPS increased 8.3% year-over-year to $4.56. Turning now to the balance sheet. We ended fiscal year 2023 with a cash balance of $405 million and a $1 billion untapped revolver. Free cash flow for the year was $527 million. This was the result of $603 million of cash generated from operating activities net of $76 million of CapEx. Our operating cash flow reflects our strong operating performance, offset by higher cash taxes due to the impact of Section 174, higher interest and higher spending on growth-oriented investments in our people and our business. Our net debt at the end of the fiscal year was approximately $2.4 billion and our net leverage ratio was approximately 2.4 times adjusted EBITDA. Turning to slide eight. In fiscal year 2023, we deployed approximately $905 million of capital in a measured and balanced manner. This included approximately $440 million connected with the EverWatch acquisition, $236 million in cash dividends and $224 million in share repurchases at an average price of $91.83 per share. We remain patient and disciplined in our capital deployment approach as we navigate macroeconomic conditions, budget uncertainty, and a challenging M&A environment. However, we remain focused on finding small to midsized tuck-in acquisitions that are consistent with our culture and VoLT strategy, active accelerants to growth that meet our financial parameters. Today, I am pleased to announce that our Board has approved a quarterly dividend of $0.47 per share that will be payable on June 30th to stockholders of record as of June 15th. Please turn now to slide nine for a discussion of our fiscal year 2024 outlook. As Horacio noted, we are entering into a period of uncertainty in our external environment. This is a familiar pattern for us. In recent years, we have typically guided to and planned for a strong first half and a more uncertain second half of our fiscal year. We are doing the same this year, as you will see reflected in our guidance and operating priorities. That said, we have significant momentum in our business, on the demand side, on the supply side, and in our operations and we are well-positioned relative to long-term demand trends. This supports fiscal year 2024 growth and profit guidance above the organic targets and our current investment thesis. At the top line, we are guiding to revenue growth of 7% to 11%, 6% to 10% of which will be organic. We expect to start the year at or above the top end of this range. Where we fall within this range for the fiscal year will depend on several factors, including the pace at which we can win work and get it on contract, the outcome of government funding and budgetary debates, and the timing and extent to which we add consulting headcount throughout the year. At this point, we are targeting 3% to 5% growth for the full year, in line with historic patterns, but likely weighted towards the first half. We expect adjusted EBITDA margins in the high 10% to 11% range. This translates to an adjusted EBITDA dollar range of between $1.075 billion and $1.105 billion or approximately 6% to 9% growth year-over-year. We expect adjusted diluted earnings per share of between $4.80 per share and $4.95 per share or growth of approximately 5% to 9% year-over-year. Lastly, we expect operating cash flow of between $500 million and $600 million and free cash flow of between $400 million and $500 million. This assumes a CapEx spend of approximately $100 million and this cash guidance reflects EBITDA growth offset by continued investments to grow our business, higher interest costs, and temporarily higher cash taxes. In closing, I want to recognize our Booz Allen team for their hard work, dedication to mission, and commitment to the firm. It is through their efforts that we had an excellent finish to our fiscal year 2023, built momentum that supports continued outperformance in fiscal year 2024, are well positioned against the most pressing needs of our clients, and remain on track to achieve our multi-year investment thesis. With that, operator, let's open the line for questions.

Thank you. Our first question comes from the line of Bert Subin with Stifel. Your line is now open.

Hey, good morning, and thanks for the question.

Good morning, Bert.

Good morning, Bert.

Good morning. So Horacio, hiring has been really strong and your results are reflecting that. You have a couple of contract headwinds that you alluded to as we think through FY'24. How are you contemplating the potential risk of just trying to reallocate that labor? And if the tighter budget backdrop does ultimately materialize, is the plan just to slow down hiring so that supply matches demand?

Thank you for that question. I'll start. To answer your specific question, I think you're asking the Focus Fox question. To give you some background there. Our contract now that the protest has been adjudicated, we can talk a little more about this. Our contract will end on September 30th. Roughly speaking, we have about 400 Booz Allen people on the contract. We expect to retain about half, about 200, and reallocate them to other mission priorities. We have a lot of important cyber work going on throughout the firm that these folks would be tremendous for. So that's sort of the play on that. In the greater scheme though, when you look at the business overall, the business is doing great. I'm incredibly proud of where we ended last year with industry-leading organic revenue growth with a lot of momentum, as you pointed out. There's momentum on both sides. I think on hiring and retaining, there's great momentum, but there's also a number of contract wins around things ramping up that make us feel like certainly over the next six months, the business is poised to perform very well. We are cognizant, as everybody else is that the second half is going to be challenging from a budgetary standpoint. And so our guidance for FY'24 reflects that range, if you will, the lower end of the range speaks more to a more challenging environment. The upper end of the range speaks more to a second half that looks more like a first half. But even if I get past that, and I look at the investment thesis horizon and everything else, we're on track. VoLT is paying the dividends we wanted it to pay and it positions us well for the long-term against topics like China, like AI, like 5G, cyber, quantum, I could keep going. So the business is in very good shape.

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

AI, as you pointed out, this is a topic that has been near and dear to my heart given my own background and something that we, as a firm, have been very focused on. We have a leading position that's backstopped by a talent base that is very large and growing at around 20% per year. A contract base that has not just some really big AI contracts, but we're infusing AI into all of our major procurements to the extent that it makes sense, and it increasingly makes sense, more and more clients are interested in either having the option to imbue AI or asking for it directly. And so this becomes a differentiator not just against our AI portfolio, but against our whole business. We have some unique intellectual capital and intellectual property in this area that we're very proud of. I talked about AI-Assemble. There's several other things that we are doing. And the partnerships that we've built and we continue to build also give us an edge in the market. We have talked for years about the co-creation that we do with NVIDIA around Cyber Precog. I spoke about that a couple of calls ago. We talk about the things we're doing with our corporate venture fund, finding small companies that have unique technologies, I really do believe that it's not just that we're a leader today in the federal space, but that we are poised to project that leadership more broadly over time.

Thank you, Horacio.

Thank you.

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

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

Let me first say that my crystal ball is the same as everyone else's. I do believe that this is going to be a huge area of focus for all of our clients. If you break it down, first of all, the digital transformations that we're seeing that really affect our entire client base, especially our civil client base are going to require more and more use of AI to accelerate everything from coding to verifying to then managing these very large systems and very large, if you want, citizen interactions, there's just so much that AI can do to both lower cost and improve the way in which citizens interact with the federal government at the civil level, and that is huge. On the other side, on the national security side, I also believe that AI is going to increase the efficiency and reduce the decision cycle that our clients need to go through. And tying it to our other priority, this is very important as it relates to China, which, of course, is also investing heavily in AI and the US, which still has a lead, has to continue to maintain this lead. Our clients understand that, and congressional leaders that I've spoken to understand that. Everyone is trying to figure out how to do this in a way that is both aggressive and sensible from the standpoint of being ethical and being very thoughtful about it. And again, we have both the brand, but most importantly, the capabilities and the people to be central to that conversation.

Great. Thank you. Sorry for putting you on the spot with that. And then maybe Matt, one for you.

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

Yeah, good question. We said we're targeting free cash flow yield of approximately 10% excluding Section 174. In '23, we delivered 110%, which was great, and we are going to be below that in '24 for a couple of reasons that we think are temporal. We are seeing an increase in working capital consistent with the rapidly growing business, particularly on the outlay side. Second, we talked about this last year, but there's some timing related issues related to some tax strategies we've been discussing. This year, we're going to have an incremental $50 million in cash taxes, but likely with no corresponding offset related to those tax strategies. But I will point you to an approximately $150 million receivable on our balance sheet that we do anticipate receiving in future years. And then obviously, we, like everyone else, are experiencing higher interest expenses. So I do expect, Sheila, to be in a meaningfully better position in FY'25 as some of this is temporary.

Okay. Great. Thank you.

Thank you.

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

Hi. Good morning, everyone.

Hey, Rob. Good morning.

Horacio, I wanted to ask and perhaps this is for Matt as well. But as we think about all of the budget discussions and the potential for growth to be at the lower end of some of the predictive ranges of late, just based on what we're seeing come across in real-time on the fiscal '24 budget and what that might mean for holding growth. Beyond that, is there a concern perhaps that some industry players may try to compete a bit more aggressively on price in that kind of environment and that contract margins just generally could come under pressure for the industry?

It's an interesting debate, and we've seen similar situations in the 2011-2012 timeframe. If we find ourselves in a more moderated budget environment in the next few years, we have considered some of the historical turbulence when thinking about the second half of our business in our '24 guidance. Regarding your specific question, price pressure is always present in this industry; this is not new. We have shifted our business strategy towards aspects that are central to our clients' missions, requiring more technical content and specialized intellectual property that leverages partnerships and creates differentiation. We always compete on price, as does everyone else, but we believe we are in a less price-sensitive segment of the market due to the uniqueness of our offerings. Additionally, as I've mentioned and Matt has noted in previous calls, we are growing our business at a faster rate than our infrastructure and back office to maintain flexibility in our operating model during market fluctuations. If I take a step back and look at our investment thesis of $1.2 billion to $1.3 billion in EBITDA by FY'25, we are on track to meet that goal, factoring in a reasonable market projection.

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

I'll start, and I believe Matt has quite a bit to add on this topic as well. I want to highlight a couple of points. First, we have an operating model that enables us to quickly allocate resources from one area to another. When managing the business, we operate as a single entity rather than separate sectors, which allows us to pursue opportunities and swiftly adjust leadership, resources, and investments as needed. This approach provides us with resilience regardless of the budget's future shape. Additionally, regarding our civil portfolio, we have substantial work with organizations like the VA, which may have a greater focus on defense-related projects compared to traditional civil accounts. It's difficult to predict how everything will unfold, which is why we prefer to discuss things at a macro level concerning the overall firm.

I believe you're inquiring about the potential for margin pressure, and based on our guidance this year, the answer is no. We are projecting margins in the high 10% to 11% range. We anticipate that the defense business will accelerate. Additionally, I want to emphasize what Horacio mentioned; we are managing the business very efficiently and have control over many factors related to labor costs and corporate expenses, which provides us with considerable flexibility.

Makes sense. Thank you, both.

Thank you.

Thank you. Our next question comes from the line of Spencer Breitzke with Cowen & Company. Your line is now open.

Hi. I think you're referring to Cai von Rumohr. Did those IRS wins occur in the fourth quarter and are they being announced now? Also, could you provide more details on why you lost Focus Fox? This has been a strong area for you, and the winter has not been as robust. Thanks.

Yes, Horacio, do you want to take Focus Fox first?

Yes. Cai, on Focus Fox, I think you would have to ask the client more than us. But in general, we have a very strong cyber business that is growing fast across the entire portfolio. This is one contract. And albeit a business that we wanted for a long time. It's a business that was migrating, the new contract is very different from the old one in terms of looking for lower skill sets. And therefore, it did not fully align with the type of work that we do and we like to do in the community. So I guess that's the best explanation that I can give. More broadly, though, we're seeing a lot of opportunity to deploy cyber resources across the portfolio, our defense clients with cyberspace are now really an active warfighting domain are more and more interested in making sure that they can get at scale some unique capabilities. And our civilian clients from a defensive posture are also very interested in that from a law enforcement perspective, and from a critical infrastructure protection perspective. So as I look at, one of the things that we did, which we talked about in 2021, and I know you'll remember, is we built this national cyber platform where we allowed ourselves the opportunity to look horizontally across the entire cyber playing field as opposed to being stovepiped to minimize the national risk that exists in the seams of those stovepipes and that strategy has proven to be very successful.

And Cai to specifically answer to your question about EDOS and EDITS they were included in our Q4 book-to-bill.

They were. Okay. And then last one. If, in fact, you see deceleration in Intel, isn't that a margin plus a mix plus?

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

Excellent. Thank you so much.

Thank you.

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

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

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

Thanks. We are observing a consistent environment similar to what we experienced in the previous quarters, characterized by numerous small to midsized opportunities. Both buyers and sellers are being careful in their approach to the M&A landscape. We are actively involved in several processes and have made significant progress with a few of them. I mentioned in our script a measured and balanced strategy to differentiate from simply advocating patient discipline, which we will continue to uphold. We have leading organic growth and a solid balance sheet. Our capital deployment in 2023, including Q4, has been very balanced, and we are dedicated to deploying capital in a careful manner to enhance long-term shareholder value.

Got it. Thanks. And then if you could touch on, I guess, the margins. So you're running a little bit of the sort of mid-10s long-term guidance that you've given, could you give, so what are the biggest drivers there? Is it mix or billable expenses? And is there opportunity to maybe come in ahead of that longer term if you can continue the strength?

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

Yes. I want to just to amplify on that last point. When we built our investment thesis, we were thinking mid-10s because we also wanted to make sure we had the capacity to invest in the business in the right way. And the good news here is the acceleration of organic growth beyond what we originally predicted, opens that up a little bit. And then to Matt's last point, the fact that we're running the business so efficiently and so tightly also creates room in our rates to invest in the business and position us for growth. So that is giving us the opportunity to maintain margins above what we thought while also accelerating the investments required so that the business does well not just in '24 and '25, but really beyond.

Okay. That's helpful. Thank you.

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

Thanks. Good morning.

Good morning.

Matt, a follow-up on the cash flow question. Could you just bridge us from the $603 million operating cash flow in '23 for the $500 million to $600 million, I guess, between EBITDA, exactly what you're expecting for net working capital, R&D, broader cash taxes? Just help us with that bridge.

Yeah, I'm not going to give you much more than I want to have to-date. We'll look at getting out some more detailed guidance in the appropriate forums. But essentially, the bridge is threefold, right? Higher interest, higher taxes with no corresponding offset this year, but we anticipate something in FY'25 or beyond and higher outlays consistent with the working capital required to fund a growing business where 30% of your work is done through subs.

Okay. And then a question about '25 investment thesis target. So you did a little over $1 billion in EBITDA in '23, forecasting close to $1.1 billion in '24. Is $1.3 billion possible? And as we think about 2025 or is it much more likely closer to the bottom end? And if $1.3 billion is possible, how do you get there?

We're still on track to the $1.2 billion to $1.3 billion. The business is doing extremely well. We're operating organically above our expectations. As Matt pointed out, we are still very interested in strategic acceleration through M&A if we can find the right assets at the right price. When you put all of that together, depending on timing and everything else, where we fall in the range that will be the guidance question a year from now. But right now, we are, again, we recognize that the budgetary situation is challenging that this creates uncertainty. We all read the papers this morning. There's still no deal on the debt ceiling. I think all of that is real, and we're not ignoring it, but we believe that as a business, we are well positioned to have a very strong first half to manage a reasonable set of outcomes in the second half, to deliver another year of organic revenue growth that leads the industry. And that hopefully positions us really well to have a strong '25 as well. So when you put it all together, we're working on what we can control. And if I can just do a shout out to the team, our team is doing an exceptional job of doing just that.

Great. Thanks very much.

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

Thanks very much and good morning.

Good morning.

I wanted to follow up on the Intelligence segment. And moving aside from just the Focus Fox contract, I think we've talked about that. But just as a percentage of sales, the intelligence portions, I think, down probably about five percentage points versus a few years ago. And kind of how you see that evolving in the mix? And is there something changing about that end market that kind of makes the opportunity there sort of less aligned with where you want to take the company?

The Intel business is a very important part of our portfolio. We are very proud of the work that we do there. It fits within our overall national security approach. And there's a very close integration between what we do in defense and what we do in Intel. And increasingly, between what we do in some areas of Intel on the cyber side and the work that we do on some of the civilian agencies around critical infrastructure protection and the like. The percentages and everything else are really driven by where we see opportunity at any point in time. In the last few years, our Civil business has done extraordinarily well and it's become a bigger share of our business and that's a business that continues to do very well and we're very proud of it. As we look into this year, I think we think our Intel business will probably level out, be more sort of towards the modest growth, maybe even flat as our Intelligence business has seen higher-than-anticipated contract turnover. Our intel market leaders are focused on realizing the full value of the EverWatch transaction and repositioning our work against critical defense intelligence, national intelligence, and cyber missions. I think that's a big part of why Booz Allen is successful through different cycles is that we actually have in our operating model and the way we work together the ability to shift resources, I believe, much faster than anyone else. And I think that's a capability that is going to continue to serve us well, given the environment that we're in right now.

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

Excellent. That's helpful. Thanks very much. And then just as a follow-up, I wonder if you guys could talk a little more specifically about this kind of second half budget environment that you're thinking about, just to kind of put a fine point on it? Because there's one set of outcomes that maybe people had been thinking about that was sort of involving government shutdowns, continuing resolutions, kind of really challenging kind of scarier stuff. And then there's another kind of path that's been talked about in some very recent reporting that's kind of, okay, maybe there's very low single-digit growth in the defense budget over the next few years, which maybe is not an ideal outcome, but given the other possibilities, not that bad either. So when you talk about a slowing second half and kind of not seeing the momentum continue in the second half, was that based on the idea of like full year continuing resolutions government shutdowns type of scenario or an environment where we do get low single-digit growth is a good outcome or is that kind of consistent with kind of a real slowdown in the second half?

If you examine our guidance, which is between 7% and 11%, the higher end assumes that the second half will mirror the first half closely, similar to last year when a full budget was passed in December, providing clarity for our clients. This clarity was very beneficial. Conversely, the lower end reflects more uncertainty for our clients. It's important to note that in our business, few programs depend on specific budget line items. This situation largely hinges on how our clients perceive their ability to implement initiatives, which can either facilitate or hinder progress and is more about their perspective than exact figures. The quicker we achieve certainty about the future, regardless of the specifics, the better our clients will be able to set their priorities. We are in a strong position, and while we won't be unaffected by budget cuts if they occur, we are well-equipped to be resilient since we are central to the mission, contributing unique and vital work. Ultimately, the key question is how soon we can attain that certainty. In summary, we are optimistic about our guidance for FY'24, anticipating strong organic revenue growth and remaining aligned with our investment strategy goals for FY'25. We are pleased with our current status.

Okay. Great. Thank you very much.

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

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

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