Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's Earnings Call covering Third Quarter Results for Fiscal 2019. At this time, all lines 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. Nick Veasey.

Thank you. Good morning and thank you for joining us for Booz Allen's third quarter fiscal 2019 earnings announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We've also provided presentation slides on our website and are now on slide one. I'm Nick Veasey, Director of Investor Relations, and with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President and Chief Financial Officer. As shown on the disclaimer on slide two, please keep in mind that some of the items we will 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 third quarter fiscal 2019 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 most comparable GAAP measures in our third quarter fiscal 2019 slides. It is now my pleasure to turn the call over to our CEO, Horacio Rozanski. And we are now on slide four.

Thanks, Nick, and good morning, everyone. Lloyd and I have excellent results to share with you this morning. The numbers show that the people of Booz Allen continue to deliver strong disciplined operational performance and outstanding solutions to our clients. We are comfortably ahead of where we expected to be at this point in the year. And as a result, we are able to take two very positive steps. Once again we are raising our earnings guidance by $0.10 for FY 2019. And secondly, we are announcing a larger increase in our quarterly dividend any recent years. Our performance through the first three quarters, demonstrates the strength of the market position we have built under our Vision 2020 growth strategy. It is this differentiated position that forms the basis for our investment thesis and gives us confidence that we will continue to outperform our competitors. As I have said in the past, the payoff period for our strategy is here and we are seeing the very real value it's creating for the firm, our talent, our investors and the critical missions we serve. With this in mind, today Lloyd and I will take you through our third quarter results, put them in context of our investment thesis, and share how we're thinking about the remainder of the fiscal year. Going back to last spring, when we first gave you the FY 2019 guidance and outlined our investment thesis, you'll recall that we entered the year with a lot of confidence about Booz Allen's future growth and it carries through to today. We said that we expected our unique market position to drive substantial increases in earnings not only this year, but over a three-year horizon. The investment thesis pointed to significant ADEPS growth, resulting from a combination of organic revenue…

Thanks Horacio and good morning everyone. Today I'll cover our third quarter performance. But before I begin, I'd like to say how proud I'm of the results our people have achieved. Three quarters out of the way through our fiscal year, we're ahead of where we expected to be and remained poised to meet or exceed the financial goals we announced at our Investor Day. ADEPS growth is at the core of our investment thesis and I'm excited that we're again raising our full year earnings guidance. Given our strong start to the year, we're also narrowing our revenue guidance. We believe Booz Allen's strategy and market position will continue to support the successful execution of our clients' core mission, which is the foundation of our ability to consistently deliver strong shareholder returns. To reiterate what Horacio said earlier, the government shutdown had a negligible impact on our third quarter given that it fell during the holidays. But we do anticipate that it will have a small impact on Q4 profitability and revenue and potentially a more meaningful impact on near-term cash collections. I too could not be more proud of how our leadership and colleagues at all levels reacted to the shutdown. We worked hard to minimize, to the extent possible, shutdowns impact on our clients, their mission, our performance, and our people. In my remarks this morning, I will take you through the third quarter numbers and describe how both our excellent performance through the first three quarters and the 35-day lapse in federal funding have affected our guidance for the full year. Please turn to slide three. Starting at the top line, revenue and revenue excluding billable expenses grew by 13.1% and 12.2%, respectively compared to the third quarter last year. The increases were due to continued…

Thanks, Lloyd. Before opening the lines for Q&A, I want to take a moment to recognize and congratulate our colleague Tony Mitchell. Next weekend Tony who's a 30-year veteran of Booz Allen, an Executive Vice President and a leader of our Justice Homeland Security and Transportation business will be honored as Black Engineer of the Year. He is richly deserving of this award. As an extraordinary leader and mentor and a model for young women and men everywhere who aspire to be tomorrow's leaders in technology. I'm so proud to call him my colleague and my friend. What makes this achievement especially noteworthy for our firm is that Tony is only the latest Booz Allen Executive to be so honored by the U.S. Black Engineer and Information Technology Magazine. Our own Lloyd Howell is a previous Black Engineer of the Year; as our Board member, Art Johnson; and Former Executive Vice President, Reggie Van Lee; Dennis Via, an EVP and retired Four-Star Army General who some of you met at Investor Day received the BEYA Lifetime Achievement Award in 2013. Booz Allen works hard to attract and retain diverse talent at the executive level and throughout the ranks. We're proud to be named recently by Forbes as one of America's Top Employers for Diversity. We believe varied backgrounds on perspectives make us stronger as a firm and keep us true to our purpose and values. So, it is indeed gratifying to claim five Black Engineer of the Year honorees as part of the Booz Allen family. Congratulations to Tony and to all of this year's award winners. Okay, Nick, let's open the line for questions.

Thanks, Horacio. Please open the lines, Brian.

Thank you, sir. My pleasure. [Operator Instructions] And our first question will come from the line of Carter Copeland from Melius Research. Your line is now open.

Good morning, gentlemen and another great set of results. Congrats.

Thank you.

Thanks, Carter.

Just a couple of quick ones. One, interested in the conclusion of the shutdown what sort of behavior and activity you saw if it was sort of a return to normal? Or not just wondered if you can us some color there? And then secondly, Horacio I wanted to review my comment on the hiring environment. Obviously, situation there in Northern Virginia got a little bit more complex recently, or is intended to and clearly the job markets tight but you guys have a lot of backlog to execute on. I just wanted to give us kind of an update on how you see that evolving here?

Sure. Hopefully, I remember the second question by the time, I’m then answering the first one Carter, but -- on the first question about the shutdown, we are seeing good signs things are recovering to normal at an accelerated pace. I think everybody was very and eager to get back to work. Certainly everybody in the government, they never did Booz Allen. So we're pushing hard on that and we're seeing the results. On the broader question about the hiring market as you saw we've added about 1,000 people throughout the year. That's the net number and more than 400 this quarter alone. So we're – I’m very please with where we are on that. We have to retain that momentum frankly at least through the end of this current fiscal year, because the opportunities there on the demand side and we're completely focused and poised to do that. The overall market is a tight market. Unemployment as you know is low. The types of talent that we're looking for we've been fighting for, for a while. You talked about the changes in Northern Virginia those -- we're monitoring those with interest, but I will tell you we have a vibrant business in Seattle, but we hire there quite affectively. So, I feel good about our ability to compete Booz Allen and to continue do what we need to do.

Wonderful. Thanks. I’ll let somebody else ask.

All right. Thank you.

Thank you. And our next question will come from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.

Hi, good morning, guys, and thank you for the time. Just on that last -- Carter's last point in terms of maybe the headcount. Horacio, is there anyway you could talk about the business mix maybe shifting? It just continues to surprise me that you could grow revenues and earnings as quickly as you do with headcount only up mid-single digits. So, is there a mix shift going on in your business maybe where it's more software, less labor content maybe over the prior year or over the last three years you could talk about?

I would answer this way. I think as you know when you look at our investment thesis the whole notion of option value is to build businesses like that. That is still nascent. That's not affected the results. Right now what's driving the results now and again we had a great quarter. And I love the numbers for this quarter, but when you put them in context of the year, we're talking about 7% to 8% that's the combination of bringing on headcount. It's a combination of the fact that salaries are rising. It's a combination of the fact that we're seeing robustness in the pricing model for our services. And I think a lot of that is driven by change in mix around more technical work, closer to the client's mission and all the things that we've talked about around Vision 2020. So that's sort of how the math works underpinning that is the strength of the business driven by our strategic repositioning over the last five years I believe.

Okay. Thank you. And then Lloyd, maybe one for you as you think about trying to put in the initiatives to improve working capital maybe can you elaborate on some of those?

Sure. As I said in my prepared remarks, we were not satisfied with where we are. That being said, we really see that the timing event, we made great improvement in our second quarter and that was great to see, but it's not a linear process and we appreciate that. We're confident that we're going to get it right. Business is performing really well as indicated by our Q3 results. We also don't see a change in our capital deployment strategy. We expect to make the $350 million that we committed to and we're on track for our three year goal of $1.4 billion. So again, as I said, we're not pleased with where we are. We got the right – we think the plan in place to get the improvement. We remain close to our clients as well as we're working with the payment – so that's about that what I can say about it.

Thank you.

Thank you. And our next question will come from the line of Cai von Rumohr with Cowen. Your line is now open.

Yes. Thanks so much. Great quarter, guys. Your foreign business, where your commercial foreign was up about 40% in the quarter still small, but a very outsize gain. Can you give us some comment on what's driving that? And it is still is profitable?

So our global commercial business, the numbers from queue show, we had a very good quarter. If you remember last quarter was a little software. First quarter was great. Overall that business continues on track where it's been growing north of 20% for a while now. And we expect that to continue. The core of that business is our work in cyber security and that we believe we've differentiated proposition. It's clear the market believes that too, and that we’re being rewarded for that. So I'd like to see that business to continue to grow into the strong double digits for a while. As you pointed out Cai, it’s a small business so quarter-to-quarter, one contract moving in one direction or another will drive the quarter's revenue. But the long-term trend is clear, which is very strong double-digit growth that we intend to continue to build.

Thank you. And then quickly for Lloyd you mentioned $20 million revenue impact from the shutdown in January. Do you expect to catch that up in February and March? And what kind of incremental impact does that have on the P&L if you're looking 2013 I think both CACI and Leidos had decremental margins that were about twice their normal. What would your decremental be?

Yeah. It's hard to say Cai, whether we'll completely make it up. As Horacio mentioned, in his previous response we're off to a good start with the government reopening. We certainly aspire to get back on track as quickly as possible. But the fact that we are changing our guidance to the top half of the previous range, 7% to 8%, to demonstrate our confidence that we've taken that into account. In terms of margin impact, we raised our range to 10% to 10.5% for the year. We see probably a $0.02 to $0.03 impact from the shutdown. But in terms of where we end up for the year, we're excited about the range and the fact that we've been expanding it. And we think that, given our business model and our closeness that we have with our clients, we'll continue to have a strong year.

Thank you very much.

Thank you. And our next question will come from the line of Robert Spingarn with Credit Suisse. Your line is now open.

Hi. Good morning. Horacio, when we look at the 8% revenue growth and we averaged the year so far. Is there a way to parse that into your normal program growth versus market share capture?

It's not really -- I think the way we think about it, is we look at our growth rate over time against sort of, clearly, the average of our competitors. And we are constantly ahead of them by several points and that in our mind is market share growth. So that's the best I can do. Without the market -- the other thing is, we talk about the market as if it's one thing. What I think is important for me to emphasize, I really do believe that we have carved the market for ourselves at the intersection of mission and technology and consulting, helping clients. I believe that at this point nobody can do what we can in terms of helping clients who want to transform their missions through technology. And a lot of the growth that we are seeing and especially, you've seen some of the large awards that we've talked about in the last few calls, they really relate to that, whether it's the move to the cloud, whether it is improving cyber security across the entire civil domain, whether it is making significant operation scale investments on AI. Those are the types of things that three years ago weren’t even on the radar and now are out there and we're winning more than our fair share of that, driven by the strength of the capabilities that we bring.

Is there a way to quantify how much of your $20 billion in total backlog is now from these option value opportunities? Or at least how that has trended as a percentage of backlog over time?

I will say the option value piece is very, very small. That's not where the upside is. Where the upside is, is in the injection of new technology into the portfolio. And I will tell you at this point, most of our conversations with clients are around that. As you know, when a client buys, especially a large procurement, the reason, but I'm not trying to be difficult and it is not that I don't have, I don’t want to give you a number. I can't give you a number, because you take a very large procurement, say $0.5 billion. The reason we want something like that is because, we are able to bring in AI and make AI real to that client. Now inside that $0.5 billion, it's a bundle of services, some of which other people can do and some of which is this. But ideally the core differentiator has been on our ability to make this new technology real. And so that's -- so from that perspective a lot of our portfolio, a lot of our backlog is moving in that direction.

The only thing help in terms of quantifying is we're really excited that 25% of backlog is re-compete work and 76% to new work. And on top of that we're maintaining our win rates at historical high, 63% sort of new work and in the high 80% for re-compete. And I clearly agree with what Horacio said -- value opportunities are exciting, but we're in the early stages of that.

Okay. Thank you both for the color.

Great.

Thank you. And our next question will come from the line of Krishna Sinha with Vertical Research Partners. Your line is now open.

Hi, thanks. Maybe one for Lloyd. Can you parse -- I know you noted the cash flow is a timing issue that's what you said. But can you just parse that between how much of that $100 million reduction in operating cash flow guidance is from the shutdown delay -- receivables from the shutdown? And how much of it from those -- that sort of specifics civil work timing that you were talking about?

Sure. I mean -- so up to $100 million we think is kind of the headwind that we're experiencing we're very confident that we're going to collect. For example $30 million of it is due to the IRS coming back online in terms of the IRS refund that we mentioned in Q2. So, that $100 million is the headwind. We still maintained as a timing issue for us. We're confident that we're going to get it but that is moving to the right and we're working with our payment offices and our clients, do as best we can, but that's a little bit more of a breakdown to answer your question.

And then your margin was better, tax was better, revenue was better. I mean let's say the timing issue resolves itself this year which is in a bull-case scenario. I mean is there an opportunity for you guys to be above the $500 million just given that the operating drivers have been so much better?

No, we don't see being above the $500 million.

Okay. And then another one on just margin. Margin performance was very good. Looks like a lot of the beat was driven by costs revenue -- cost of revenue reduction. Can you just talk about what costs are being reduced there, is it overhead? Is it direct cost? And then is this margin rate sustainable going forward just given that your long-term guidance what you gave at Investor Day was sort of 10 to 30 bps of margin improvement over the three-year time span? And you seem to be doing well ahead of that. I mean is this reduction in the cost of revenue going forward? Is it sustainable?

The fact that we're increasing the range to 10% to 10.5% for this year gives us a lot of confidence. And as we said really due to strong contract performance as well as we had a long-term visibility improvement as well as some global commercial contracts that were signed. I'm not -- I'm ecstatic that we're ahead of expectations and very pleased with this year's performance. But we're nine months into three-year journey. And at this point, I really don't want to comment on where we will be three years from now. So, at the appropriate time, we'll look at that. We remain confident that we're going to reach the upper end for sure. But right now just bear with us, we'll address that at an appropriate time in the future.

Okay. Thank you.

Thank you. And the next question will come from Joe DeNardi with Stifel. Your line is now open.

Hey, guys, this is Jon for Joe. Just want to stick with the margin question. so far that -- when you put out your numbers in the -- at the Investor Day, you're looking at FY 2018 EBITDA of 9.5%. Is the current run rate sustainable? Or should we think about that 1% to 3% of that base?

Again for this fiscal year, we think we're going to be between 10% and 10.5%. We're not going to address run rates into the next three years simply because there are a lot of factors that we want to take into account. We want to see where we end up. And consultation with our business leaders will be prepared to respond accordingly. But right now again very pleased with our performance. And in fact we're ahead of expectations for this year. We're very happy about it.

Fair enough. The other aspect that we just wanted to touch on is what's the best way to think about the growth in billable expenses? We've seen it kind of moderate this quarter. Is it going to solve historical trends? Or should we think about it staying at the current level next quarter?

Yeah. I mean, for the year we said, it's going to fall between 29% and 31%. There's a lot of for us challenges and sort of nail it to a specific percent just giving contract awards and the content to make up within those awards. But we feel very confident that for the year we'll end up between 29% and 31%.

All right. Thank you.

Thank you. And our next question will come from the line of Tim McHugh with William Blair. Your line is now open.

Thanks. I might try at the margin question a little bit differently I guess. Just as we think about this year as you came into it, I know you talked about a couple of things in terms of favorable pricing and performance. But I suspect it's mostly productivity and the people, because you knew a lot about pricing coming into the year. Is there something you're doing differently with how you're matching people with engagements, how you're using technology, how you're structuring? And trying to understand if that changes, how we should think about the natural productivity rate that you're capable of…

Yeah, thanks for the question. I mean, we have been on a journey to do all of those factors better and better year-over-year. And as Horacio has said, we're essentially in the payoff period of Vision 2020 and getting our people deployed, meeting our utilization targets, managing our costs as well as one-time things that have come through were hard to anticipate about -- expansion that we're seeing this year. And we expect those fundamentals to continue going forward. So the questions that or those about, beyond this year, we want to continue to see those fundamentals continue, but also ask a question are there any other things that might contribute beyond just solid operational performance. But you're absolutely right, but basics are kicked in and management team deserves all the credit for making sure that our people are deployed and contributing to the clients in the best way.

Let me build on that. This is one of those years where all the stars are aligning. And we're obviously very pleased with that. There are three things that ultimately will drive this. One is the underlying pricing. And as we've said before and we continue to believe this is a great market, it's a very strong market and we're seeing good pricing for at least our services in this market. The second piece of it is the underlining performance on contracts, and with a very large business with a lot of large contracts, you want them all to go great. And sometimes they all do. And sometimes you're dealing with issues. This year we're dealing with fewer issues than we have in the past and you're seeing that reflected. And the third piece is, when you're bringing on a lot of people is how quickly can you put them on projects, because there's a naturally ramp up time. And again, part of it is the process and part of it is just the nature of how things are working this year. The team has done a fantastic job by getting people billable as close to the hiring point as possible. Obviously, more focused on retaining all three of those well into the future. We want every contract to go perfectly, we want everybody to get billable on day one and we want pricing to continue to be this robust. And that's the piece we can try to control and the piece we're focused on. I am optimistic that a lot of this goodness can translate into the future. But I think it's too early to declare details and certainly numbers around that.

Okay. Thank you. That's helpful. Then, Lloyd, just a follow-up, the comment term A loan, just to be clear, as you -- when you draw that down, is that to pay off the term B? Or will you use that for other purposes in terms of capital deployment?

Yes. It's not to pay off the term loan B, it would be for other capital purposes.

Okay. Thank you.

Thank you. And our next question will come from the line of Tobey Sommer with SunTrust. Your line is now open.

Thank you very much. I was wondering if you could comment on the contract that you have protested, was that an existing re-compete? Or was that a new contract? And maybe you could use the opportunity to comment on the protest environment generally. Thanks.

So there's a lot of that -- we're very excited about being able to turn on that contract, hopefully, after the – what's been prevailing during the process. It's a great contract, it speaks to all the things we're talking about before in terms of bringing cyber security and a number of capabilities at a very high level. So we're waiting. A lot of that work is, not all of it is new. And again, it's an exciting win, not just for financial reasons, but because it's right in the middle of our strategy. The process environment continues to be what it is. We would like to see, frankly, on the part of the entire industry a little more rigor how we can process it and a little more restraint, but it is what it is. I think we're used to it, I think as an industry. I think the government is used to it and they know how to manage it better. And we'll continue to keep on keeping up. But if I can come back, I mean, I think what, at the end of the day, the reason that I'm optimistic, even with everything else that we're talking about is, we have a strategy that works. We have strategy that creates differentiation and shows real results to our clients. I think that allows us to win the work at the rates that Lloyd has been talking about. I think that allows us to overcome process when they come. And I think ultimately that allows us to perform the work in a way that is not just very profitable, but a very successful decline which then keeps on coming back. And I think that's the part of all of this that we can control. That's the part we're focused on. That's the part we’re excited about.

Thank you. Could you share with us your views on what the 2020 budget may hold in store for the industry particularly given the shutdown in CR extended and that's been part of the month? Thanks.

I wish, I was certainly wrong. I will offer the following. First of all, for the balance of this current fiscal year, we're very optimistic and excited about the robustness in the business. We'd like to see an agreement in Congress that goes frankly ideally through the next election not just through the next fiscal year. And I remain optimistic that will take place. Having said that, as we said at the very front of this call the last government shutdown and our ability to do manage through it as successfully as we did and raise our guidance in light of it, I think demonstrates that both our operating model and the quality of our management team is such that, we can handle market disruption better than most. We don’t look forward to it. We're certainly not interested in seeing it. But when it comes, we know what to do, we know how to do it and we know how to succeed in both great markets and more turbulent ones. So we're going continue to focus on what we can control. We're going to continue to drive this business aggressively against investor thesis that we put forward last June. And hopefully, we'll continue to have great conversations on calls like this one about how the business is moving along.

Thank you very much.

Thank you.

Thank you. And I'm showing no further questions at this time. So now, it's my pleasure to hand the conference back over to Mr. Horacio Rozanski, President and Chief Executive Officer for closing comments and remarks.

Thank you, Brian and thank you all for your questions. Lloyd and I look forward to a strong finish to the year and we're very proud of all the firm has accomplished. We're working as hard as ever to ensure that Booz Allen's growth is sustainable and that our value to clients and investors is crystal clear. So thank you for taking the time to be with us this morning, and have a great rest of the day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.