Release Date: May 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Booz Allen Hamilton Holding Corp (BAH, Financial) reported its best financial performance since going public, with revenue and earnings both increasing by more than 15%, nearly all organic.
- The company's VoLT strategy (velocity, leadership, and technology) is driving significant growth, positioning Booz Allen Hamilton Holding Corp (BAH) at the center of technology transformation across the federal government.
- Booz Allen Hamilton Holding Corp (BAH) has a robust pipeline of $63.8 billion, up 38% year-over-year, indicating strong future growth potential.
- The company has seen significant growth in its AI business, with AI revenue reaching nearly $600 million in FY 2024 and aspirations to grow this to over $1 billion in the next couple of years.
- Booz Allen Hamilton Holding Corp (BAH) has a strong balance sheet with ample capacity for strategic acquisitions and share repurchases, supported by a net leverage ratio of 2.4x adjusted EBITDA.
Negative Points
- Potential market volatility and uncertainties due to the upcoming election and geopolitical factors could impact Booz Allen Hamilton Holding Corp (BAH)'s operations and financial performance.
- The company faces significant recompete risks, particularly in its health and defense businesses, which could affect its revenue if not successfully retained.
- Despite strong performance, Booz Allen Hamilton Holding Corp (BAH) anticipates continued uncertainty from societal and geopolitical conflicts, which may affect federal budget negotiations and funding cycles.
- The company's global commercial business, representing 2% of revenue, was down 25% year-over-year due to previously disclosed divestitures, indicating challenges in this segment.
- Booz Allen Hamilton Holding Corp (BAH) has significant interest expenses, which are expected to be marginally higher in the range of $180 million to $190 million for fiscal year 2025, potentially impacting net income.
Q & A Highlights
Q: So my question is about this recent memo on AI that the Biden administration put forward and the memo mandates that each agency will have to appoint a Chief AI Officer. Have you seen any of those like that increased demand come through? Or how are you thinking about opportunities as these new officers actually think about their AI strategy, use cases and all those things?
A: Mariana, thank you for the question. Here's how I think about it. AI is becoming an integral part of how the federal government operates. We are seeing it more and more over the last couple of years. You've heard me talk about things moving from demonstration projects to prototypes. We're now entering the scale phase. And so it makes sense that governing AI correctly in these agencies, managing the resources and the investments against it be done, and it makes sense that some of these agencies (inaudible) and AI officers, and they're making a difference. And Booz Allen's has been poised to take advantage of this growth in AI now for several years. I think you know we've been talking about this from before it became popular. And our business is growing. As I mentioned in the prepared remarks, we are looking at a roughly $600 million business now. We are thinking that business alone will reach $1 billion in a couple of years. But more importantly, we are seeing AI become a differentiator across a lot of our procurements. And the fact that we have a leading position that is recognized externally that we're doing work that our clients see as somebody else being able to do, I think, opens doors and opportunities for Booz Allen that we're very excited about. And as we look forward, we really think that AI is really AI and. It's AI and cyber, where we also have a leading position it's AI and space where we're making significant inroads. It's AI and Zero Trust, AI and communications. And so I think Booz Allen's ability to continue to expand and grow as a result of that and to be differentiated is only going to increase in the years to come.
Q: So you mentioned AI as a differentiator. Could you please also give us some details or color around these like contracts that you have for recompete? what is the recompete risk and how you think these skills position you towards like having a stronger IP win?
A: Sure. Let me frame this conversation in a couple of ways. The first 1 is we're coming off our best year ever, right? And we're entering our FY '25 year with a lot of momentum. VoLT, our strategy, is working. And VoLT (inaudible) for velocity, and we are faster than ever before. We're strategically, really well positioned. And as we said earlier, while we recognize the uncertainties that an election year can bring, we are guiding to the top end of our investment thesis, and we're entering this year with momentum and with resiliency, both in our balance sheet, in our portfolio and everything else. Recompetes are a part of our business. The reality of the business is, if you look at it over the last 5 or 10 years, we've gone from almost no billion contracts to now a significant portfolio of billion plus contracts. And it is our 5-year contracts, 20% of those on average will get recompeted every year. This year, there's a little concentration of that in our health business and a little bit in our defense business. As I look at those, we are really well positioned by the quality of our delivery, by the uniqueness of our offerings and by the work that we do. And this is all wrapped inside of a pipeline that is a record pipeline, close to $64 billion of opportunity. So we're looking at the year with optimism. We're very focused, laser-focused on winning our recompetes but also capturing new work and taking advantage of the fact that a number of these recompetes come with increased scope and increased ceiling, which also presents no opportunity.
Q: I had a couple of questions for you, but I wanted to start, Matt, with you on the growth. You've talked about hitting high single-digit organic growth and about 3% to 5% headcount growth for the full year and a book-to-bill around 1.2 to 1.3 in order to hit that high single-digit organic growth. Now you're guiding perhaps a little bit above that. You've already said that you anticipate mid-single-digit headcount growth this year. So what should we anticipate for book-to-bill? And then as a follow-up to that, are there any significant recompetes that you have coming up this year that we should be thinking about?
A: Yes. Thanks, Rob. I'll take them in turn. Look, as Horacio said, we're entering the year with a lot of momentum, both on the supply side and the demand side. Starting the year on the supply side, with headcount growth of about 7.4%, so above the mid-single-digit headcount target that we've talked about historically, which is part of the reason we're guiding the robust 8% to 11% organic growth. And then on the demand side, 1.25x, which is sort of right in line with where we want to be. To give you a feel for how we anticipate the year is going to play out, we do expect that quarterly growth profile on a year-over-year basis to be strong, but maybe a little more even than last year, primarily driven by some quarterly comps. You recall last year, we grew 16% in the first half. And we'll see a similar pattern for margins, where they're more stable than our historical patterns similar to what we saw last year. It had a solid start to the year. I'm not going to call where we're going to end up on book-to-bill. So we've had a really good start, particularly on the demand side. Recompetes are part of that, but as Horacio said, we've got a really robust pipeline. It's up 38% from where we were at this point last year. So the fact that we're targeting mid-single-digit headcount growth for this year, which typically sets us up for next year, and we've talked about the robustness of our backlog or book-to-bill and obviously, our pipeline, I think, gives you a feel for how we're thinking about growth over the medium term.
Q: Okay. And then Horacio, just for you, high level, and you did -- you talked a bit about in the prior question and throughout the call, but you've been at the forefront of things like AI, 5G, cyber all along. And we think forward, next 5 to 10 years, curious in terms of the major growth trends where you want to be a leader, how should we think about things like quantum computing and post-quantum encryption?
A: I really appreciate that question, Rob. I mean, I think part of the reason we are sitting here feeling so good about the business is because over the last decade, we've invested on a number of things. And we missed a couple
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
