Good morning. Thank you for standing by, and welcome to the Booz Allen Hamilton's earnings call covering second quarter results for fiscal year 2022. [Operator Instructions] I would now like to turn the call over to Mr. Lloyd Howell, Executive Vice President, CFO and Treasurer of Booz Allen Hamilton.

Thank you. Good morning, and thank you for joining us for Booz Allen's Second Quarter Fiscal Year 2022 Earnings Announcement. As some of you know, our Head of Investor Relations, Rubun Day, recently left the company to pursue other opportunities. We thank him for his contributions and wish him well. Our Vice President and Chief Accounting Officer, Laura Adams, has stepped in as Interim Head of Investor Relations, which she will oversee while also maintaining her ongoing role. Laura has been a finance executive with the firm for over a decade, overseeing many areas of corporate finance, including governance, financial and treasury oversight and risk mitigation. She has played a vital role for me and our leadership team in our strategic decision-making around our capital allocation and M&A plans and our investment thesis more recently. With that, I turn the call over to Laura.

Thank you, Lloyd, for that introduction. I'm excited to support the team and get to know our valued investors and analysts even more. And good morning, everyone. We hope you've had an opportunity to read the press release that we issued earlier this morning. And we have also provided presentation slides on our website and are now on Slide 2. As shown on the disclaimer on Slide 3, 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 second quarter fiscal year 2022 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 second quarter fiscal year 2022 slides. It is now my pleasure to turn the call over to our CEO, Horacio Rozanski. We are now on Slide 4.

Thank you, Laura, and good morning, everyone. Laura, it's great to have you play a more public role on these calls because you have been a leader on our finance team and integral to the quarterly earnings process for many years. I have personally relied on your expertise for as long as I've been CEO. So welcome to the call, Laura, and thank you for taking on this extra responsibility on an interim basis. And everyone, thanks for joining the call. Lloyd and I, along with several of our Booz Allen colleagues, were excited to be in New York City earlier this month to share our new investment thesis and our strategy for growth. It was great to see so many of you in person, and we hope you took away from that event a deeper understanding of our strategy, business and multiyear financial goals. Today, we will continue the conversation in the context of our second quarter results for the fiscal year. And we will show how Booz Allen is already setting up to accelerate into the financial goals described in our investment thesis. I'm also pleased to share an update on our future work rollout. Before diving into the second quarter results, I want to briefly recap a few points from our Investor Day, starting with VoLT: Velocity, Leadership and Technology. VoLT is the strategic framework that will accelerate our growth and create exceptional shareholder value. Through VoLT, we will capitalize on future market opportunities and leverage our positioning to deploy talent and capital against the nation's highest priorities. As part of our new strategy, we also told you about the opportunities we see for hyper growth in the areas of digital battle space and national cyber, among others. And then those of you who attended AUSA a…

Thanks, Horacio, and hello again. Before I speak through our latest results, I want to add my thanks again to those who were able to join us just a few weeks ago in New York City for Investor Day. A recording of the webcast is available at investors.boozallen.com. Our overall objective with Investor Day was to once again demonstrate Booz Allen's commitment to long-term profitable growth. Leveraging our VoLT strategy, we will make the internal investments and strategic acquisitions required to drive and execute that growth. In our view, the first half of fiscal year 2022 was an inflection point. As we move into the second half of the fiscal year and move past the direct and indirect influences of COVID over the last 19 months, we are entering the next leg of the firm's multiyear journey. As Horacio noted, we closed out the first half of the fiscal year with top line performance in line with our expectations and prior guidance and with bottom line performance well ahead. This gives us great confidence in our plan for the full fiscal year. Our large backlog, strong bookings and proposal activity signals continued client interest and strong demand for our work. Our hiring engine is now firing on all cylinders, positioning us to drive growth in the second half of the fiscal year. We closed on the acquisitions of Liberty and Tracepoint. As we have noted, we anticipated early year choppiness in our top line results as we move into a post-COVID operating rhythm, which played out as we expected. Our strong balance sheet position and favorable market conditions have allowed us to take advantage of a number of opportunities, including attractive levels of debt financing, M&A and share repurchases. As a reminder, we had forecast constrained low single-digit top line…

Thank you, Lloyd. Operator, please open the line.

[Operator Instructions] Our first question comes from Sheila Kahyaoglu with Jefferies.

Good morning, Horacio and Lloyd, and welcome Laura. I wanted to ask first about revenue growth. It's trending up 3% in H1 and 1% organically, implying 14% growth in the second half and 10% organic. Horacio, you mentioned 3 significant accelerators, one which was ramp-up in hiring and two, some of the acquisition contribution. So I wanted to ask about those 2 items. If we think about the ramp-up in hiring, I think it's up about 4% organically in the quarter. How quickly -- what should be we looking for when it comes to headcount? How quickly are employees revenue generators? And then as a follow-up to that, on the acquisition contribution, maybe can you talk a little bit about Tracepoint and how much it adds? On our calculation, it's about $80 million if we use the same multiple as Liberty.

So Sheila, let me start to unpack those questions. On the revenue front, we're pleased that the growth is in line with our expectations and positions us for acceleration in the second half. I think what's important is there are about 3 reasons that we're confident. One is that the ramp-up and improvement in our recruiting and hiring, as Horacio and I said in previous calls, this is the operational priority. And with a first half adding 1,500 folks this year, up just under 6% year-over-year, particularly in a very tight job market, we're very pleased with that part of our operations kicking in. We're not done. With an eye toward the balance of the year, we've got to maintain that pace. But as Betty shared with everyone at Investor Day, we're feeling really confident about that. The second point is that we're kind of in an apples and orange kind of comparison this year. The productivity and the time off dynamics last year, people weren't taking any time off. Our productivity was through the roof. And by our estimation, that's about a 400, 450 basis point headwind. So if you take the growth that we had this quarter and you were to add to that, we're in the mid-single digits which keeps us on pace for why we're confident in the second half of the year. And then the third point, I would add is that we're going to get the full inclusion of revenue from the acquisitions that we've made. Liberty is off to a great start. The integration is going very well. We've won some significant procurements together. And we just see that continuing. And then I'll finish sort of my part of the response, because you probably have to remind me of the other parts of your question, but when you look at our backlog, book-to-bill, 2.03x for this quarter trailing 12 months to 1.28x. As we've always said, we don't feel demand-constrained especially when the backlog is up 18% to an all-time record of $29 billion. So we've got the supply side underway. The demand signals are strong. We're working through, as you heard in our prepared comments, some timing issues in some parts of the portfolio. But overall, we believe we're on pace for an acceleration in the second half.

Sheila, I'll add a couple of thoughts to what Lloyd just talked about and in this school of thought around acceleration of momentum. As Lloyd pointed out, there's a number of reasons why the numbers almost get better by comparison as we go into the second half. But what we're sensing and that has us confidence and optimistic is real momentum in the business. I think you can see it in the book-to-bill. I'll tell you the pipeline is really strong. And it's not just strong in terms of the numbers, it's the type of work that we described in both as being the next wave of growth for Booz Allen. And it's aligned to these key mission technology intersections where we see hyper growth. And so we believe that the work that we can show you in the quarter, plus the work that is coming, all positions us well, not just for the balance of this year, but against these 5 to 8 revenue -- organic revenue and the investment thesis through 2025 and beyond.

Sheila, you had second part...

That's okay. I was on Tracepoint, how do we think about the total revenue contribution for Tracepoint, given it was a minority interest? And I think you guys spent $114 million in the quarter on that?

Yes. At this point, it's really not that material. We're excited about the transaction with the simple fact that this is a high-demand area, particularly for our global commercial clients, but in this part of the journey, it's really not material.

Our next question comes from Gavin Parsons with Goldman Sachs.

Lloyd, you gave a lot of color on margins and why we might expect those to decline in the second half of the year, but you kind of just keeping your margins -- keep driving margins higher. I appreciate that the multiyear outlook had a lot of detail and we talked a lot about it at the Investor Day, but when does that trend just kind of start heading downward? Is there a step function at some point? Or is that kind of flat over time through the Investor Day target? And it certainly doesn't seem like you're underinvesting, but are you overearning in any certain areas? Just any more color on that would be great.

Yes. I mean, right out of the gate, we've had solid operational performance, and I think our margin performance is indicative of that. There are a couple of things I'd point to in terms of what's happening structurally. One is that as we're emerging from the pandemic, things that have going into it been very strong was profitable contract level performance, and that has maintained over the past 18 months. And I think that's been a tailwind to our margin. Number two is we're now seeing the contributions from our inorganic transactions, more fixed-price work, particularly when you're looking at what Liberty has brought to the game. And over the past several years, we've had a real prudent cost management set of initiatives underway. And I think across the portfolio, all of that has kicked in and is really institutionalized. For this period, we've also had some unique, what I call, contributions. One is now we have the ability to bill for fee in the Intel market. The timing of unallowable spend, which gets, I think, to your trend question, we expect to start to pick up in the back half of this year. And we've probably repeatedly talked about billable expenses and the fact that they've been low versus historical norms. And you heard in our prepared remarks that we're expecting that to kind of pick up move into the middle of the range. So on a trending perspective, we see it beginning, in terms of spending, to pick up in the back half of the year. We'll probably see that it will come back a bit due to some of our investment activity. But as you know, in the back half of Booz Allen, we usually are investing in our people, our infrastructure, getting ready for the next fiscal year.

Gavin, if I can just expand a little bit and connect this conversation to our Investor Day discussion, I think what you're seeing, if you look at the trends over the last couple of years, is that the margin potential in this business continues to improve as a result of the work that we're doing, our differentiation in the market. And frankly, this is a time to brag about the team, just the operational performance keeps getting better and better even in light of some really challenging conditions all around us. And what I think is impressive about the last 18 months is we've managed to drive margins, while at the same time, we invested our people. If you remember, we set a high $100 million for pandemic response. We did a lot of employee welfare work, especially around mental health over the last year. And a number of other things that position us well to continue to be an employer of choice and be able to drive the talent into the business that we need to achieve our goals. So as Lloyd pointed out at Investor Day, what we have in front of us is real margin potential and the ability to invest in our business intelligently, as the opportunities present themselves, to continue to drive both top and bottom line growth.

Got it. I appreciate all that detail. And maybe just if you could give a little bit more color on the delays of the DoD starts that you referenced in the prepared remarks.

Yes. I mean it's as frustrating to us as, I think, to anyone. I think in our defense market, a couple of dynamics. One is we continue to be well positioned for long-term growth. And the demand for our services continues to accelerate a lot of our client urgency around modernization, as Karen spoke to during our Investor Day and the Joint Warfighter. We've got, again, a tough comp to Q2 of last year, where productivity is at all-time high. That being said, we've won really good work, but the ramp-up has been slower than expected. We're expecting in the second half of this year for that to pick up. There's no indications from our clients that they intend for that dynamic to persist. So we're working our way through it. And we've also got some larger opportunities that we're expecting to come in, in the back half of this year as well.

I mean everything we're hearing from clients, and I spent a lot of time with clients at AUSA, I spent time with clients really over the past 6 months, with a lot of plans across the board, not just in defense. But in particular, defense clients see the work that we're doing in digital battle space as absolutely a priority for great power competition and for what's to come. And so while it is true that things now are a little slower than they would like and we would like, we're doing great in terms of driving those businesses, and we expect momentum to accelerate.

Our next question comes from Matt Akers with Wells Fargo.

It's actually [ Eric Gain ] on for Matt. Just wondering what drove the big uptick in fixed price contract mix during the quarter. Is that [ a single ] from here? And could that drive margins higher?

Yes, Matt. It's really a function of Liberty coming into the portfolio. They've been doing great. Clients have been very pleased. We've also seen some upside potential there, which would sort of provide some tailwind to the margin. We've got strong contractual performance across the portfolio. So a combination of that plus Liberty is the dynamic.

Got it. If I could do one more. Just quickly on M&A. What are you seeing for valuations in the current market and how competitive you think the deals are?

Maybe I'll start with this one just to switch up the pattern. As we talked about at Investor Day, our posture in M&A is to look for opportunities that are strategic accelerators to our business. And that is becoming a central plank of VoLT and in some ways a bit of a difference from our prior approach. And Tracepoint is a great example of that. Liberty is a great example of that. Albeit small, our investment in Latent AI a while back is a great example of strategic acceleration. And so that's the goal. Underneath that, it's a very competitive market. It's challenging to find the right things that will give us strategic acceleration. What we're seeing is some of the uniqueness of Booz Allen that makes us attractive to clients and to talent. Actually reflects also well as being attractive in the acquisition arena, where we're able to potentially have better discussions, more relationship-based discussions, and reach a mutually agreeable win-win-type scenario, even in the light of some overheated evaluations that are operating around us.

Our next question comes from Cai von Rumohr with Cowen.

Terrific. So I have a 2-part question about revenue growth, 2 issues. One is the impact of PTO and what that might be going forward. And I bring that up because Northrop on its call mentioned a higher PTO in the quarter, but [ it said ] expected it to go back to normal, so that, that was sort of a negative this quarter, but it should be better next quarter. And the second question is on organic growth. I mean you gave it for the full year at 4% to 7%. You didn't repeat it this time. You gave it at Investor Day. I mean if Liberty is really doing better than expected, I would have guessed that organic growth was 0 and revenues, ex billables, excluding inorganic growth, would have been minus 2%. Is that essentially correct? And what is the organic growth target for this year?

So Cai, let me pick up your first comment regarding PTO. We expect the impact, by our estimate, to be around 400 basis points to start to mitigate in the second half. So I would be supportive of what Northrop said or shared in terms of it over time starting to normalize. I think we're all watching it closely. Our workforce's PTO balances is elevated, obviously, because folks haven't been going on. We have a program in place to manage that and track it, but we would expect that, that will start to normalize going forward. In terms of organic growth, no purposeful oversight or reason why we didn't repeat it, but we still remain 4% to 7%, given that we've had a nice pickup in headcount, as I've always shared with you, that with inflation on top of it puts us comfortably in that range for the year. And we've also said that we expected the first half to be low single digits. And the organic component of that, I think it's tracking. And we expect that to accelerate in the second half. So again, some moving pieces here, but all consistent with what we expected, and we still remain confident about the guidance for the full year.

So you're saying PTO was a 400 basis point impact to revenues this quarter, and it should diminish in the second half. Is that essentially correct?

That's correct, Cai.

Our next question comes from Tobey Sommer with Truist Securities.

I was wondering if you could give us some comments on some of the HR things that you're doing to stem the tide of turnover to continue to attract talent.

Tobey, happy to do that. And I think I'm going to try and do justice to Betty Thompson's really excellent conversation about this at Investor Day. But I would put this in really 3 categories. And again, I mean, I think the numbers bear out what we're saying. The increase in headcount over the first half is the combination of we are not seeing this great resignation wave that people are talking about. In fact, our attrition rate is at or below what we had forecasted for the year and really strong hiring. And it's not just what we're -- as you know, we're bringing in technical talent, we're bringing the highly clear talent. We're bringing the kind of talent we need to execute against our strategy. And I would put the -- what we're doing and why it's working in 3 categories. The first one, which Betty really talked about at length is the combination of our culture, our focus on diversity and the work we've done over the last 1.5 years to keep our workforce safe and keep our workforce productive and engaged is clearly paying dividends in our value proposition and our brand in the talent market. The second one is where there's internal and external excitement about our future of work program. We can't wait to really get that rolling. As I said in my prepared remarks, we had to delay the rollout by about 1 month, 1.5 months to accommodate the realities of the Delta wave. And I am not one to try to predict the sort of the course of the pandemic going forward, but I'm optimistic and we're getting going, and hopefully we'll have all of our facilities open under the new future of work protocol right around Thanksgiving. And the third one, which I think is really important, especially as it relates to technical talent, is the type of work that we're both doing and we're investing in under VoLT is the work that is most exciting to type of talent we're trying to attract, right? The ability to bring AI to a core national mission gives us an opportunity to attract AI talent on par with any technology company out there. We may have deeper pockets, but don't have access to the passion that these missions represent for people. So if you look across all 3 of those, I think this explains why we had a good first half on hiring, but I think it also explains why we're optimistic about having momentum in the future.

As my follow-up, I'd like to ask, do you have -- what's your expectation for the impact of vaccine mandate on your headcount and headcount growth? And sort of in that context is -- do you see anything unique in your business or business mix that would either lessen or make the impact more severe than others who play in the government space?

The short form of the answer is we've thought about that and taking that into account to the best of our ability in reaffirming our guidance. So at the numbers level, I think sort of that's the numerical answer. If I sort of click down below that, we are intent on getting 100% of our workforce compliant with our policy, which is consistent with the mandate. That is our goal. This is what we are dedicated to doing. I keep talking about the quality of this team over 29,000 people now. And our job is to retain everybody. We've done it in a very Booz Allen way. I think you know us well enough. Much like we've done everything, this has been a subject of rich, internal conversation. I personally held a couple of town halls. The last one had several thousand people who attended where we talked about it and took questions and had a very open and frank discussion, which was challenging at times but important. All of our leaders have done that too in their respective business. Our group leaders, our infrastructure leaders have all held these types of -- and we're having a great internal conversation. Again, challenging at times, but with a goal of trying to get to 100%.

Our next question comes from Seth Seifman with JPMorgan.

Maybe just a quick clarification first, Lloyd. I apologize if I missed it. Did you guys state the Liberty sales contribution in the quarter?

We didn't in our prepared remarks. If you look in the Q, it's about $88 million from Liberty for this quarter.

Okay. Great. And then roughly how many employees did Tracepoint add? And would you guys be willing to give a target for where you want to be at headcount at year-end?

For just Tracepoint or for...

No, no, for the whole company, yes.

Tracepoint, just under 100 added to the mix. Every year, we go into the year target mid-single-digit growth. We're on pace for that, as Horacio and I have said. So we hope to be over the [ 30 thou ] mark or around near by the end of the year.

Our next question comes from Louie DiPalma with William Blair.

Horacio and Lloyd, several times over the past few quarters, you cited a large civil cyber program that was as a contributor to your revenue deceleration. Has it restarted to a full run rate for the December quarter?

Louie, the short form of the answer is not yet. We are seeing some ramp, but we are not back to the full run rate.

Sounds good. And on a separate topic, it appears that Accenture Federal paid a very premium multiple for Novetta. Is Booz Allen willing to pay like very high multiples for strategic deals that bring a lot of technology content? Or just in terms of deal valuation, should investors more or less expect similar types of multiples to what you paid for Liberty?

I'll start and then Horacio wants to get in. Before we even get to the economics, I mean, we look at every opportunity in terms of strategic alignment, cultural integration and then, financially, does it make sense? Within that rubric, we have the capacity to stretch if it makes sense, if the first 2 criteria are met. But as you've heard me say in the past, we're going to be disciplined and patient. And we feel we've got a great handle on this market, what clients need. And we're looking for partners to bring into Booz Allen that makes sense. But that's about where I think financially we spend.

Yes, I think within the concept of strategic acceleration and the discussion that we've been having, we appreciate the need to pay full price for high-value, high-quality companies. And at the same time, we want to make sure that we're capturing significant value from those. So like Lloyd said, we're going to be disciplined, we're going to be thoughtful and we're going to leverage the same approach that we have to everything. We're going to build relationships. We're going to execute a disciplined playbook to the extent that we can, and we were successful twice this year. We're going to try to do it in a way that isn't an overheated auction. And again, we are leaning forward on this, but in a disciplined way.

Our last question comes from Ron Epstein with Bank of America.

Yes. Maybe a couple of quick questions. One, are you seeing any indirect impact of the supply chain issues, the chip shortage? And just to understand and maybe you can give us all better feeling for it, because the big defense companies really haven't. Where is the supply chain issue for them, right? I mean this industry, at least the guys making hardware seem to be -- have been harder hit by supply chain and even the commercial side of the industry.

Yes, Ronnie, we have not seen any of the dynamics that others have talked about regarding supply chain. To your point, we just don't have those issues. The other companies that whatever their portfolio looks like, it is what it is. But for us, we aren't seeing any supply chain issues.

Got it. Got it. And then as we get into the second half of the year, it looks like your -- you've some pressure on your EBITDA margins. What's that coming from?

Yes. It's really 4 areas. We're going to continue to ramp up in hiring. It's really 2 flavors of that, folks who have sold their funded positions as well as what we call capability hires in anticipation of work that's on the horizon. Number two is that typically in the back half is where we reward our people. Number three is we make improvements to our infrastructure and technology as we have an eye toward the next fiscal year. And we step up our investment in growth areas and capabilities that we think are going to position us for the future.

Yes. I'll just close out by just saying we're intent on delivering against the conversation at Investor Day of 50% increase in adjusted EBITDA through 2025. That requires us to grow the top line, to drive strong margins and to invest intelligently to make it all work both for the short and for the long term.

Thank you. There are no further -- no other questions in the queue. I'd like to turn the call back to Horacio Rozanski for closing remarks.

Thank you, Katherine. I'll just close by saying how great it was to have the opportunity to see so many of you in New York City earlier this month. Certainly, it was great in and out itself, but also being able to safely hold an in-person Investor Day was an encouraging indicator that we are indeed emerging from COVID. We look forward to keeping you updated in future calls regarding the progress on our VoLT strategy and especially on the superior financial performance, we believe, it will produce. We're extremely excited about the opportunities ahead for our firm, for our clients, for our people and certainly for our investors. So as always, thank you for your continued interest and support, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.