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Booz Allen Hamilton Holding Corporation (BAH) Q4 2023 Earnings Call Transcript

Booz Allen Hamilton Holding Corporation (BAH)

Q4 2023 Earnings Conference Call

Company Participants

Nathan Rutledge - Investor Relations

Horacio Rozanski - President and Chief Executive Officer

Matt Calderone - Executive Vice President and Chief Financial Officer

Conference Call Participants

Bert Subin - Stifel

Sheila Kahyaoglu - Jefferies

Robert Spingarn - Melius Research

Cai von Rumohr - Cowen and Company

Matthew Akers - Wells Fargo

David Strauss - Barclays

Seth Seifman - JPMorgan

Presentation

Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's Earnings Call covering Fourth Quarter Fiscal Year 2023 Results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions.

I'd now like to turn the call over to Mr. Nathan Rutledge.

Nathan Rutledge

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.

Horacio Rozanski

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 client's 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 transform missions and create extraordinary growth opportunities.

Today our nation is at a historic inflection point. Instability in the geopolitical environment and the rapidly accelerating pace of technological change are converging. This creates complex interconnected mission challenges. Two top priorities are the pacing threat of China and the rise of artificial intelligence or AI. As our country faces these realities, Booz Allen is prepared to leave 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 shifted 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 engage 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 it jumping into popular cautiousness.

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....

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