Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering first quarter results for fiscal 2016. [Operator Instructions] I'd now like to turn the call over to Mr. Curt Riggle.

Good morning. Thank you all for joining us today for the Booz Allen First Quarter Fiscal 2016 Earnings Announcement. We hope you've had an opportunity to read the press release for our first quarter earnings that we issued earlier this morning. We've also provided presentation slides on our website, and we're now on Slide 1. I'm Curt Riggle, Vice President, Investor Relations, and with me to talk about Booz Allen, our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Kevin Cook, Executive Vice President and Chief Financial Officer. As shown on the disclaimer on Slide 2, please keep in mind that some of the items that we'll 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 first quarter fiscal 2016 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 first quarter fiscal 2016 slides. It's now my pleasure to turn the call over to Horacio Rozanski, our CEO, and he'll start on Slide 3.

Thank you, Kurt, and good morning, everyone. Today, Kevin and I will take you through our first quarter fiscal 2016's results, and our performance aligns with our long-term growth strategy as well as our plan for the fiscal year. I'll also talk to you about our innovation agenda, an exciting part of the Vision 2020 growth strategy. Those of you who are most familiar with us know that Booz Allen's success over time has been grounded in 2 things: long-term focus and strong day-to-day execution. We established a path that guides our decision-making, we defined specific goals for the near term and then we relentlessly and successfully execute against those goals. So that's what we continue to do. We're managing our business today to drive sustainable quality growth and created value for our clients, our people and our shareholders. We entered fiscal year 2016 with a plan to front-load some costs so that we can capture increasing opportunities in today's health care market. Our first quarter results reflect the execution of that plan. One quarter into this fiscal year, our pipeline is healthy and the stabilized market is signaling demand. Bid and proposal activity have picked up and we have built a bench so that we can capitalize on the opportunities that the market is presenting. As always, our day-to-day focus is on being an essential partner to clients, delivering solutions that are right at the center of their most critical missions. At the same time, under our growth strategy, we're investing for the future in new businesses, capabilities and talent so that we have lasting differentiated and profitable position in key areas. Our growth platforms are maturing nicely. I am very excited by the way our team is reorienting towards growth, sharpening our competitive edge and expanding our clients'…

Thank you, Horacio. I'll begin on Slide 4. Before I take you through the details of the quarter, I want to underscore the point that we manage the business on an annual basis and that we opened the year just as we planned. The market has stabilized to a point that clients are focused on priorities and their missions, and as a result, we have a solid opportunity pipeline and have seen a healthy increase in proposal activity. In our last 2 fiscal years, we adjusted our spending pattern to create financial flexibility during the first half to position for potential uncertainty in the market in the second half. This year, as a result of our confidence in the market, we've made a change so that spending will be even -- more even throughout the year. We have pulled forward spending on bid and proposal activities to ensure we take full advantage of our strong opportunity pipeline. We're maintaining the bench that we built over the past year and our growth platform leaders are moving out against their plans and our own track for a more even quarterly spend this year. This flatter-spending profile for the year also leads to a more balanced margin profile for FY '16, with relatively lower margins in the first half and relatively higher margins in the second half as compared to the prior 2 years. With that, please turn to Slide 5 and I'll walk you through the drivers of our results for the first quarter. Starting at the top, as you saw in the press release, revenue increased 2.2% year-over-year and was driven primarily by an increase in billable expenses and a headcount that was higher than in the first quarter of last fiscal year. In the quarter, we saw declines in adjusted…

Thanks, Kevin. As I mentioned at the top of the call, we're focused on executing our plan for the year while investing in the future. I'd like to spend the next few minutes updating you on the progress of Vision 2020 and our innovation agenda more specifically. Our growth platforms include: systems delivery, engineering, cyber, innovation and a commercial and international markets. We already see parts of this businesses delivering healthy growth on margin enhancement. As our platforms mature, we're reconfirming the power that comes from integrating them with our traditional strengths. We already hold a differentiated position in the federal market due to our people's dedication and the knowledge of our clients' mission as well as a reputation and intellectual capital as the government's premier consulting firm. Our growth platforms enhance these positions by expanding and extending our ability to serve clients and create more powerful solutions to their challenges. We're also winning new clients in both government and commercial because of our expanded capabilities, which are further bolstered by our brand reputation and top-notch talent. Within our growth strategy, the innovation agenda is a foundational platform that extends horizontally across the firm. It supports our efforts to be with more of our business to high-demand areas that require groundbreaking solutions. As background, more than 2 years ago, right in the middle of the market downturn, we made a big investment by establishing our Strategic Innovation Group, or SIG, under EVP, Karen Dahut. The SIG has developed a clear and focused innovation agenda, and in a relatively short period, already achieved a great deal. First, we're developing new services, products and technology platforms that allow us to serve clients in ways nobody else can. These include: next-generation technology platform using digital, mobile, cloud and open-source capabilities; data science solutions…

Great. Thank you, Horacio and Kevin. Shannon, at this point, can you provide the instructions for the question-and-answer session of the call?

[Operator Instructions] Our first question is from Carter Copeland, Barclays.

Just -- I wondered if we can ask a couple of questions here and, again, just the SURVIAC impact. I wonder if you could quantify how much of the work moved over to the new HD TAT and DS TAT vehicles, and whether or not that was immediate upon the ending of the previous structure?

Carter, I'll take a shot at that. While we probably won't give you specific numbers, I think it's important to understand the transition process. There's really 3 parts to it. The first is we had to replace the ceiling of the SURVIAC contract. That means moving the work to new or existing contract vehicles, and we've succeeded on that front. The second phase is we have to transfer the work onto those vehicles. And a lot of that work is transferred already, but portions are still in process. As we expected, there are some timing gaps between when SURVIAC ended and the new work begins, which is, for the most part, outside of our control. And as I said in my prepared remarks, those gaps are a key factor in estimating the revenue impact for FY '16. Third piece is comprised of recompetes that are currently underway for new contracts for major task orders. This offer not only the opportunity to replace SURVIAC work, but also to include a broader scope of work that gives us the chance for expanded revenue growth in the future. We expect these recompetes to be awarded during the remainder of the fiscal year. Now the bottom line is that we're pleased with our progress so far, even as there are some unknowns about the timing of the follow-on work. We're confident that the estimated revenue loss will not exceed that which is already been factored into our guidance for the year. And I'll also highlight something I said during the prepared remarks, and that's given that the revenue impact for the year is predominantly driven by the gap between when work ends and the timing of the new awards, we would expect to see the majority of the revenue drop in the second quarter. We'll give you an update on our October call. But I do want to highlight that our success at this point really demonstrates the agility of our business and the strength of the relationships that we have over with our -- our people built over time with our clients. I think this is when the concept of the central partner becomes reality, and it's clear that our clients are relying on us to continue with mission-critical work.

Just as -- a couple of follow-ups to those comments. The work that's moving to new vehicles that aren't in the new IAC structure, should we just assume that those kind of, I don't want to say, linearly but have a regular cadence to how they get moved over the course of the year? And then with respect to the comments in your prepared remarks around margins, how should we think about the impact of the staff that you're going to retain while you work through the gap?

Well, there's a couple of parts to the question, right? We -- with the demand signals we see coming from our clients, we mentioned the proposal activity pipeline, et cetera, et cetera, it doesn't make sense to carry those folks. The majority of them are already targeted or have moved on to replacement work for SURVIAC. And with the demand signals coming, it doesn't make sense to let those folks go, frankly, and then try to rehire to support the backlog that we think is coming. So it will impact margins in the second quarter, but we planned for that, and we haven't changed our annual guidance. We're very comfortable with the revenue impact we gave you. We mentioned earlier that it's primarily in the second quarter. And we're very comfortable with the guidance for the year at this point.

Okay. I know there's a lot of moving parts, so we appreciate the color.

You're absolutely right.

Our next question is from Bill Loomis with Stifel.

Just jumping on SURVIAC again. Just -- so it sounds like -- have you lost any contracts on the transition? It sounds like you've talk a lot about the gap, but have you actually not been successful on any of the tasks so far?

For the most part, Bill, we've been very successful. There may have been 1 or 2 small task where our client decided to stop work. But we've moved work to a variety of contracts, not just the original 3 of HD TAT, our HD and Homeland Security MAC contracts as well as SNIM. We've had Alliant, FEDSIM and many different contracts, so we've been very successful moving that work and we're pleased with where we are and where we think we'll be at the end of the process.

Bill, if I can just give a little more color and maybe try and round out this discussion on SURVIAC, because you know that part of our challenge with it is we want to make sure that you have all the information available to you, but we don't want to give you more than we have. I mean, we're -- some of this is still in process. But to emphasize, we've already replaced all the ceiling. The work is moving really smoothly and on schedule. And there's a couple of recompetes out there. Some work has moved on to transition contracts or bridge contracts and there are recompetes out there that will finalize the work. We feel confident about where all of that spans. And as Kevin said, these are competitive procurements. But on the other hand, in many cases, they’re larger than the original procurements, so there's upside to that as well. So all in all, we are confident that the guidance that we gave is the guidance that we should've given. And at the same time, I have to say, if I can take a moment, I'm extraordinarily proud of the execution by the team on this. It's -- there's a lot of moving parts. It is a very challenging thing to do and it's been done truly brilliantly.

And when you say recompetes, are you talking about just your recompetes or are you talking about the other IAC contracts, recompetes that you may be looking at?

We're competing hard for every piece of work that's out there.

Okay. So there is a much bigger pie than what you have before. And you are bidding some larger group of contracts under the IAC, right?

We're bidding very hard on a lot of things because we see the demand signal as being strong bid and proposal activity, as Kevin said. I think -- I want to sort of expand beyond the SURVIAC discussion because I think there's -- the bigger message is we're leaning forward into a market where we see more opportunity than we, say, we saw a year ago or 2 years ago this quarter. And so bid and proposal activity is up. The value of the proposals that we're bidding is up. The length of those contracts is going back to historical norms. And we're being pretty aggressive in both going after work where we believe our quality and our capabilities are a differentiator, and we're aggressively holding on to our bench and building bench in places where we think we can grow. And we used to talk 5, 6 years ago about hiring ahead of demand. We stopped talking about that because, frankly, demand was too unpredictable. We're not back to those days completely, but we are making sure that we have the people that we think we're going to need to capture the revenue as it comes.

Our next question is from Jon Raviv with Citi.

Horacio, wonder if you could talk about how much of the growth you're seeing right now is just from an overall better market versus your unique positioning and you're new capabilities and investments boosting your ability to take some share?

I think what we're -- if I can describe what I believe we're seeing is I think we're seeing a market where it's not like there's a ton more funding, and you know the overall budgetary issues that the country is still wrestling with and there's no expectation that the overall budget is going to rise significantly or anything like that. But we are seeing, as we've mentioned in prior calls, our clients having the ability now to look out beyond 4 or 6 weeks into longer time frames and begin to plan and execute their missions. And against that, we are seeing opportunity to then apply what's unique about Booz Allen and what's great about Booz Allen to help them. One of the trends that we've talked about in the past was this big moves towards LPTA. It's not like that's all LPTA contracts are -- have ended and none of them -- no more will be completed. But we are seeing a return in critical areas to best value and we are -- certainly, we believe we're the best value firm out there. And so overall, what I would describe to try and summarize is I think we are in the process of gaining share against a competitive improving market.

Great. And just as a follow-up, on M&A appetite, how do you think about -- you talked about acquiring as a force multiplier to organic growth. How do you think about that bucket of M&A versus the idea of gaining scale? And what does that thought process imply about potential bite size in this sort of market?

I guess I'll -- maybe I'll start. Kevin, I think you probably want to add to that. Kevin talked about our cash deployment priorities and I'm sure he will want to talk to you more about that, but as far as I'm concerned, the market as I see it rewards quality, rewards agility and rewards focus. I think we are the best quality firm out there. I think we've demonstrated the ability to be agile and move to the places where demand is going to be. And I think we have demonstrated that we're focused. We're not trying to be all things to all people and play from the high-end quality all the way to the commodity spectrum, because I think anybody who tries that is going to get hurt. I won't tell that we have both adequate -- more-than-adequate scale and more-than-adequate client access, so we're not out seeking for that. We're seeking for those force multipliers that will create more ability for us to grow organically. And that's really what we're after and we're extraordinarily selective. We look at a lot of things and we, as you know, do very, very few of them. They tend to be smaller. They tend to be very focused. That's what's makes sense to us in the past. That's -- but it's going back to quality, agility and focus is what the market is going to reward and I think that's where we play from a position of strength.

Horacio, if I can just add to that. I think the key point there is that we're at scale. Our infrastructure is sized to be scalable beyond this point, but we don't need to achieve greater revenue just for the sake of greater revenue. We've said this since we started talking about M&A a couple of years ago. We're focused on buying capabilities that could be a force multiplier, to use your words from a couple of minutes ago. And that does tend to have us focus more on small to midsize deals, which are the types of deals that we've done over the last 2 or 3 years. And so I think we will continue down that path. We grow a lot of capability internally through our Strategic Innovation Group as well as our market teams. So between adding those capabilities from the outside from those small and medium-size acquisitions with our own organic capability development, I think it's going to continue to reward us on the long term.

Our next question comes from Steven Cahall with Royal Bank of Canada.

Maybe the first question is on those demand signals that you talked about. I was wondering if you could give us a little more color as to any of the particular pockets of the market: defense, intelligence, commercial and international, et cetera, where those are strongest or kind of the most different from where they've been in the last few quarters, if they have?

Steve, it's Kevin. It's broad based. We have significant bid and proposal activity underway. Clearly, we had it in Q1 as we tried to move some SURVIAC work. But it's much more than that in the defense and intelligence space. And we've seen very high bid and proposal activity in our civil space, especially in the health account, including VA as well as other subagencies. An obviously, as you know, we're continuing to pursue a lot of opportunities in the commercial and international space. So I'd be hard-pressed to point to an area where we're not seeing the demand versus the opposite, and that's certainly unlike the way it's been in the last couple of years.

So with the maybe billing just down a little bit for the year on the SURVIAC transition, does that give you confidence that you'll probably hit a 1:1 book-to-bill for the year?

Well clearly, that's always our goal. I do feel good about backlog potential in Q2 specifically. And we haven't had a 1.0 book-to-bill for several years now. So I do feel good about that goal, but I think it'll be primarily driven by what we see here at the end of the September quarter.

Okay. And then, maybe just a question on cyber. A couple of your peers, Raytheon and ManTech, have gone kind of different directions with their cyber franchises: one buying a company, one sort of spinning out what it has and putting it with a commercial. So when you think about the commercial cyber opportunity for Booz Allen Hamilton, what sort of go-to-market strategy do you think about and how do you think this might develop over the next couple of years?

It's a great question. I think that's still very fluid, not so much in our thinking as it is in the market. Demand is clearly growing significantly and we are increasingly better positioned because we've been out there now for several years in our commercial/international efforts building the channel, building the client relationships, building the reputation, helping them solve some of the issues that have been in the paper. And so we see upside from that. And then sort of the precise way in which that market will evolve is, I think is hard to predict, to tell you the truth, and we're keeping our options open. But we're driving very, very hard not just against the protection of computer networks, which has been what a lot of cyber has focused in the past, but also against the protection of physical assets. You saw the recent articles about cars being hacked. There was an article that talked about the IoT not as the Internet of things, but the Internet of targets. There's a -- there's market opportunity there and we are working with clients and this is for innovation. Again, our innovation agenda plays a significant role because we have the ability to play across all of that. But these are relatively small nascent efforts still within Booz Allen on the commercial side. On the federal side, of course, are much larger and more mature. And like I said, we're keeping our options open for how to execute them most effectively.

Our next question comes from Edward Caso with Wells Fargo.

I was -- I noticed that over the last 2 years or so, there's been a steady increase in your exposure to fixed-price contracts. Could you sort of give us a sense what kind of contracts they are and whether you're increasing the risk profile of the firm?

Ed, it's Kevin. You're right. Fixed-price percentage of our work is up a bit over the last couple of years. It's a lot of different types of work. I think early on, the current administration thought that fixed-pricing everything made a lot of sense, and so that's accounted for some of this increase, even though we may not be doing anything different than what we did on the cost reimbursable contract prior to that. We also have some software development contracts that tend to be fixed-price, so it's not in -- just in one type of work where we see that. I would also say that fixed-price is our most profitable contract type. And to your point about risk, if you don't manage it well, it can be the most expensive contract type from a write-down perspective. But we manage that very well. We have a very good process internally. And we're really not, in our opinion, increasing the risk profile of the firm. I guess a final thought is we don't drive the contract type really, the client does. So if the client decides it's fixed-price and we're willing to look at that, the risk of that procurement, then we feel very comfortable with that type of contract.

And I'll just add to that by saying, our mantra is sustainable quality growth. And so we're not doing anything in the near term that puts that -- to just buy revenue or to create undue risk or looking for contract types and contracts and work that maximizes our ability to serve clients and to grow sustainably over the long run.

Right. My other question is on the cash flow. Kevin, if you can give some more color on the -- sort of the more modest level this quarter and whether you're comfortable in reaching or exceeding 120% in net income in FY '16.

Well there's a couple of components to that answer. The first is if you look at our balance between last year this time and now, we've had a couple events that we didn't have in prior years. We purchased -- made 3 purchases of -- share repurchase, I should say, 2 through Carlyle block trades and then this most recent purchase on the open market in our first quarter. We also had a onetime executive comp payout last fall. Again, onetime on that. And then we had some acquisitions last October as well. So when you look at all that, it explains the balance year-over-year as being a little bit lower than it would have otherwise been. From 120% of adjusted net income conversion, I think that's our long-term track record. I'd be very unusual for us to be below 1.04 a year, but we'll look at it as the year goes on and maybe be able to give you a little bit guide as we get further into the year. But right now, that is still our long-term objective.

Our next question comes from Denny Galindo with Morgan Stanley.

Just wanted to touch back on the M&A question. There's a number of assets that could be spun off this year. Recently, there's talk about the Lockheed IT group. And you mentioned how you primarily focused on capabilities which lead you to smaller acquisitions. But I was wondering how you would think about a bigger acquisition? How would you think about the synergies that there might be? And if you don't end up acquiring or ultimately[indiscernible] more kind of standalone companies out there, how do you think this would affect the competitive pressure in the marketplace, the pricing pressure and the pressure to win contracts?

Those are all great questions. Let me try and take a swing at them. Let me start by saying we are in this market, we've been in this market for a long time. We look at everything that happens and pay close attention to it and evaluate opportunities. I don't want to comment on anything specific that may or may not be going on only to say that we have a clear strategy, it's focused, and we're not going to do anything that derails us from that. And we're not focused, at this point on -- you can never say never we're not focused on this point in any of those large things that may or may not come to market. As it relates to what would happen if -- what we're seeing in the market is a number of things. Some like, I think the A&D product manufacturers are focusing their portfolios. There's a number of private equity firms who have investments that are maturing. All of those things are putting things in play. We don't expect there'll be significant consolidation as a result. I think there's going to be a lot of new entrants, and in fact, that's what we're seeing in terms of financial sponsors and people like that. And at the end of the day, we compete with those firms today. We compete very successfully. And as I said earlier, I believe the market in which we compete rewards quality, agility and focus. We're not going to do anything that takes us away from that and we're operating from a position of strength, and we'll continue to do so.

And then secondly on a different topic, on commercial/international, with all the cyber news we've been thinking that you'll eventually see some traction there. And if I remembered correctly, you also hired some new partners in the last couple of years who are just now able to fill after noncompetes are over. Can you give us an update on commercial and what's happening there, whether it's in cyber or somewhere else?

Sure. You're right. Last summer, we hired a number of partners and vice presidents in the Mideast and they had noncompetes and nonsolicitation agreements that carried through pretty much the end of the calendar year. So they're out selling heavily now and the business seems to be ramping as expected. U.S. commercial, same thing. We've been at that a little bit longer. It's a little bit more mature. You're right about commercial cyber, the phone does ring quite a bit. And we're very comfortable with the progress we're making there. And not only in the cyber area, but also in our health analytics area and some of the work we're doing for some major energy companies as well. So it's not all cyber in the U.S. commercial and international markets, which is good news for us, I think.

And a follow-up on that, is there any plans to disclose more information about the progress with some of those business lines?

We've always said that once it got to be a fairly significant part of our overall portfolio, we might give a little more color. While it is growing faster than the government side of the business right now, it's still not at the point where we want to talk that much about it. But what we do is every year in the K, we talk about the percentage of the commercial and international business to the whole. And I think -- Curt keep me honest here, I think on a combined basis last year, the commercial/international market grew something like 20%?

Yes. 18% after...

18%, 20% something like that. So again, we're very pleased with the growth and we would expect it to continue to expand.

Our next question comes from Brian Ruttenbur with BB&T.

My question's going to be short. In the second fiscal quarter, do you expect revenue and earnings to be down more so than third fiscal quarter? It sounds like that's going to be your big hit and then you should see some rebound to both revenue and earnings in the third fiscal quarter.

Brian, I'm going to change my practice this one time. Number one, you're new; and number two, I think is important because -- the SURVIAC transition to talk about it just this once in that we do feel like we're going to have a very strong second half and that most of the SURVIAC impact will be on the second quarter. Again, we don't normally talk quarters, but given the transition for SURVIAC, it's probably about as far as I'll go. But I'm glad you asked the question.

Our next question is from Michael French with Drexel Hamilton.

I'd like to return the discussion to the increased bid and proposal activity. I believe Horacio said that you guys are being aggressive in areas where you have capabilities and they're well-known, and you're also building out the bench. And I was wondering if you could elaborate in those 2 categories where specifically you're being more aggressive and why.

I guess I'll start, since I made the original comment. I'm not sure there's much more to say other than we see -- a year ago, 2 years ago, when you were at this point in the market, you were worried about things like government shutdowns. Our clients didn't know what funding they were going to have. It is -- the budget situation is still not perfectly clear at this point, right? I mean, there's the recent [indiscernible] bill for next year for example. But it certainly feels more stable that our clients feel like they have more control over their funding and their budgets, and they're signaling demand, they're asking for more work and more proposals, and we are out there working as very, very hard. Whereas, 2 years ago maybe we were more worried about getting caught with too many people in the government shutdown, now we want to make sure we don't get caught without enough resources to meet what could be significant demand. And so that's really -- it's more of a nuanced balance than anything else, but it's an important one. It's why I keep coming back to this issue of focus. I keep coming back to we don't want to get distracted by whatever else other competitors are doing in the market. We don't want to get distracted by other things. We want to make sure that we're driving our strategy, that we're driving our business hard, that we're executing well. I think the first quarter is a story of excellent execution on all fronts. I think the second quarter will continue to be that and all geared towards sort of this long-term view of sustainable quality growth and making sure that we're doing that and we're doing that well.

Okay. And as a follow-up, maybe you can address any recent trends regarding your win rates and whether you're seeing market share gains or losses?

Well, we usually talk about our win rates annually in the K, but our recompete win rates are right in that 90% range, new work is somewhere in the 50% range, mid-50% maybe. And when you look at our top line growth versus others, we're generally either growing faster or shrinking slower. So I'd have to say that net-net, that we are taking share over the last couple of years.

There are no further questions at this time. I'd like to turn the call back over to Horacio Rozanski for closing remarks.

Thank you, Shannon, and thank you, everybody, for your questions and for the rich conversation. As I said before, this is a quarter where I think we demonstrated great execution against the long-term plan, both for the year and beyond. And it's an exciting time to be part of Booz Allen with the market a little more stable, with new client problems to solve, expanding capabilities right here in the firm. So we're forging ahead on both our annual and long-term plans, always with an eye towards creating sustainable quality growth. Our people feel tremendously energized by the opportunities that lie ahead and we're pleased to share our progress with you each quarter. Thank you for joining us.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Thank you, and have a wonderful day.