Booz Allen Hamilton Holding Corporation 2027 Q2 Earnings Call

Thanks, Carmen. Good morning, and thank you for joining us for Booz Allen's second quarter fiscal year 2027 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 2. With me today to talk about our business and financial results are Horacio Rozanski, our Chairman and Chief Executive Officer, Kristine Martin Anderson, President and Chief Operating Officer, and Troy Lahr, Executive Vice President and Chief Financial Officer. As shown in the disclaimer on slide 3, some of the items we will discuss this morning are forward-looking and may relate to future events, and as such, involve known and unknown risk, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call.

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 2027 earnings release and slides. It is now my pleasure to turn the call over to our Chairman and CEO, Horacio Rozanski. We are now on slide 4.

Thanks, Dustin. Good morning, everyone. Thank you for joining the call. Today, Kristine, Troy, and I will share Booz Allen's results for the second quarter of fiscal year 2027. The headline is this: Booz Allen is on track with the expectations we set for this fiscal year. We delivered strong profitability and cash generation while continuing to invest for the future. The amazing people of Booz Allen are executing exceptionally well, both operationally and by accelerating our strategic transformation to drive our next phase of growth. In just a moment, Kristine will discuss our business trajectory, and Troy will cover the detailed financial results and updated guidance. Ahead of that, I will focus my remarks on the broader forces shaping our market and the progress we are making in accelerating our cyber and defense tech growth vectors.

On our July earnings call, we said there would be some uncertainty around the federal budget process and funding as we approach the end of the government fiscal year. We did see those dynamics play out during the second quarter. At the same time, demand for advanced technology solutions and products remains strong, driven by the growing urgency to transform the nation's most critical missions. Ongoing geopolitical conflicts and the changing nature of warfare are increasing the need for advanced capabilities at the tactical edge. Artificial or now super intelligence, or SI for short, is powering more sophisticated cyber threats. Across the entire federal government, there is growing need to modernize critical systems and deliver better outcomes through technology. At Booz Allen, we are innovating and investing to meet these needs.

We are accelerating our cyber and defense tech products and solutions, applying SI and agentic across our work and building capabilities in emerging technologies like physical SI, quantum and 6G. Today, I'll focus on the progress we're making in two of these areas, cyber and defense tech. I'll begin with cyber. Agentic SI is fundamentally changing the cyber threat landscape, as you see in the news every day. Adversaries can now launch autonomous attacks with the speed, scale, and persistence that traditional defenses were not designed to defeat. As a result, we are seeing significant demand for advanced cyber solutions across government and commercial markets. Booz Allen is well-positioned to meet this demand. Our cyber capabilities span from cyber operations and zero trust to incident response and SI-enabled cyber defense. We serve all 16 critical infrastructure sectors, dozens of Fortune 500 companies, and of course, numerous federal customers.

We are building on these strengths with new products, including our Vellox agentic cyber product suite. Vellox combines our deep cyber tradecraft with our proprietary technology to help customers defend against evolving threats at machine speed. One notable example is our counter SI product we call Guile. Guile is designed to counter an SI-enabled attack in real time. In testing at scale, Guile reduced attack success rates by more than 95%, and it is currently in private beta with government and commercial customers. We believe the combination of established cyber capabilities and our growing product line positions cyber to drive significant top and bottom line growth. Shifting to defense tech. Across today's national security environment, sensors and systems generate vast amounts of data, while autonomy, SI, and other advanced technologies are transforming modern warfare.

Our customers need mission-proven products that turn data into actionable information to help war fighters make faster, better decisions all the way to the edge. To accelerate our ability to build and scale these products, we acquired Ultra I&C Mission Solutions in August. Ultra brings a portfolio of commercially proven software-centric, hardware-enabled defense tech products that are highly complementary to our own. Just as importantly, Ultra brings an established customer base already relying on these technologies in operational missions. Ultra and Booz Allen have partnered successfully for years. Now, as one company, we will integrate our technologies to address mission gaps faster and more effectively than each of us could do alone. I believe some of you had the opportunity to see both Booz Allen and Ultra products at last week's AUSA conference. There was very strong customer interest and engagement at both our booths.

We're excited about what's ahead as we integrate our products and pursue market opportunities together. One final thought before I close. Cyber and defense tech actually reinforce each other. Our world-class cyber capabilities make the defense tech products we bring to market more secure. At the same time, our defense tech portfolio creates new opportunities to strengthen and scale our cyber products for missions at the edge. Taken together, they expand what we can deliver to customers. The progress we are making across both areas gives me great confidence in our ability to accelerate our medium-term growth. With that, Kristine, over to you to discuss the trajectory of our business.

Thank you, Horacio. We continue to operate in a bifurcated market, and our second quarter performance reflects those dynamics. National security continued to grow while civil remained in transition. We see strong demand in our national security business, predicated on our ability to deliver innovation and new technologies to accelerate missions. We're ramping up new awards quickly, scaling our cyber and defense tech products, and continuing to help our customers transition to outcomes-based contracting. We're already seeing progress in that transition. Within national security, our firm fixed price contract mix has increased by 3 percentage points year to date. This shift is creating opportunities to bring more value to our customers and improve profitability over time. More broadly, we expect national security growth to accelerate in the second half. Turning now to civil. Our focus is on rebuilding the portfolio and gaining momentum.

We're seeing demand for agentic software development and SI-ready data platforms across multiple missions. We expect civil's year-over-year decline to moderate in the second half of the fiscal year as new work ramps up and additional awards come in. On whole, we remain on track with the expectations we laid out for the fiscal year. Heading into the second half of the year, our three operating priorities are delivering excellent outcomes for our customers, driving strong business execution, and transforming and investing for growth. Our goal is to bring our strategic efforts to fruition, leading us back to above-market top-line growth and even better bottom-line growth. With that, Troy, I'll turn it over to you.

Thanks, Kristine, and good morning, everyone. I'm pleased with our continued strong operational execution, including capturing strategic awards, delivering profitability above our expectations, and generating robust free cash flow. Through our investments and operational discipline, we continue to position the company for durable long-term growth. Now, let me walk you through our second quarter performance in more detail. Second quarter revenue declined 3.9% year-over-year to $2.8 billion. The decline was largely due to a 10.6% decrease in billable expenses year-over-year. As a result, revenue ex billable expenses, where nearly all of our profit is generated, was down less than 1% versus the prior period. From an end market perspective, our national security business grew 1% year-over-year in the second quarter. However, excluding the impact of lower billable expenses, our national security business grew 6% in the quarter, reflecting strong customer demand.

We have significant backlog of funded work to execute on and have aggressively scaled up our hiring. We continue to see strong demand signals across the portfolio with our qualified pipeline and national security up more than 20% year-over-year compared to this time last year. Our civil business declined 15% year-over-year, slightly better than we guided to last quarter. This was primarily driven by the full quarter impact of some recompetes that have transitioned to follow on contracts with smaller size and scope, as well as fewer new program starts. Looking ahead for the rest of the year, pressure in the civil business is easing. We now expect revenue to be flat to slightly down sequentially for the third and fourth quarter as some of the first half dynamics gradually ease into the second half of the year. Turning to profitability. In the second quarter, we again delivered results above our expectations.

Adjusted EBITDA was $313 million at a margin of 11.3%, up 10 basis points year-over-year. The performance was driven by another quarter of strong contract execution. Adjusted diluted earnings per share increased 18% year-over-year to $1.76. This increase was driven by profit growth, a reduced share count, and a lower tax rate. Adjusted EPS also benefited from a $10 million earn-out from the DARPA divestiture. Our tax rate benefited from tax planning updates for the recent tax law changes. On cash flows, free cash flow for the second quarter was $263 million, driven by continued strong collections. From a working capital perspective, days sales outstanding, or DSO, was up 10 days year-over-year to 82 days.