Booz Allen Hamilton Holding Corp Q2 FY2025 earnings call

• Operational momentum accelerated in Q2, driving excellent top line performance, cash generation, strong profitability, headcount growth, and record backlog. - Growth strategy VOLT continues to fuel performance and positions the company for the future, with expectations to deliver above original expectations for fiscal year 2025 and revised and narrowed top and bottom line guidance. - In markets: Civil clients face political season uncertainty and price competition; intelligence market has transitioned to technology-enabled with cyber security growth expectations; defense business has had double-digit growth for six quarters driven by geopolitical conflicts and system modernization. - Three discrete items in the quarter: $115 million recovery from insurers related to DOJ settlement, ~$200 million tailwind to operating cash from payroll modernization, and change in estimate for provision for claim costs resulting in reduced provision and impacts on revenue and adjusted EBITDA.

Civil portfolio: Civil revenues rose approximately 12% from the prior year quarter exclusive of discrete items. Intelligence market: Revenue increased 8% year-over-year exclusive of discrete items. Defense business: Revenue increased 17% year-over-year exclusive of discrete items. Each segment's revenue contribution % isn't explicitly stated in absolute terms but the growth rates are highlighted.

• Revenue growth expected to be 11% - 13%. - Adjusted EBITDA guidance raised to a range of $1.3 billion to $1.33 billion. - Operating cash flow expected to be between $925 million and $1.025 billion. - Free cash flow expected to be between $825 million and $925 million. - Adjusted diluted earnings per share (ADEPS) guidance raised to a range of $6.10 to $6.30 per share.

• Geopolitical instability, rapidly advancing technology cycles, and growing threat landscape creating complex environments for clients. - Election-related potential for reduced visibility, changed priorities, and agendas, particularly affecting the civil market. - Uncertainty regarding cash impact from audit adjustments related to claim costs. - Potential impacts on personnel allocation if conflicts in Middle East and Europe are resolved.

Q: Guidance implies a deceleration with one-time items in Q2 and 9% organic in H2, how to think about drivers of growth in back half and election risk?

A: Horacio noted a turbulent external environment with election and geopolitical factors, but first half performance was strong, operating model can adapt to changing priorities, and feels bullish about future.

Q: What's the range of outcomes for cash impact from audit adjustments?

A: Matt said no cash impact seen currently, shouldn't expect cash inflow as audits not fully settled.

Q: Where can DSO go and how long to get there?

A: Matt mentioned DSO improved, two days of improvement persisted, and continuing to work to get closer to desired level.

Q: Demand environment relative to contract churn?

A: Horacio and Matt stated business is strong overall, can retain talent and apply to new work even if losing contracts.

Q: Discrepancy between backlog and funded backlog?

A: Matt said no unusual thing to take away, contracts have longer durations leading to different funding ways.

Q: Impact of conflicts resolution on company?

A: Horacio said some surge capacity in Europe theater could be reallocated to new work if conflicts resolved.

Q: Recruiting and retention trends into 2025?

A: Horacio said trends continue, Booz Allen is a destination for unique talent, Matt mentioned over 100,000 applicants showing interest.

Q: Factors behind Q2 margin increase?

A: Matt said good operating quarter, cost discipline took hold, one-time/timing related items reverted quicker than thought.

Q: Defense and intel transition and hardware/software role?

A: Horacio said integrating prototyping work, focusing on edge technology integration, partnering and adapting dual use technologies.

Q: Civil market future opportunities?

A: Horacio said data-enabled missions in public health, VA modernization, law enforcement, climate, etc., are key opportunities.