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Text: I'm Rubun Dey, Head of Investor Relations.
And with me to talk about our business and financial results are Horacio Rozanski, our President and CEO, and Lloyd Howell, Executive Vice President, CFO and Treasurer.
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 third quarter fiscal year 2021 slide.
We are now on Slide 5.
Today, Lloyd and I will take you through our third quarter results and the dynamics that drove them.
And we will put the results in the context of the successful culmination of our three-year investment thesis and the strength of our business in the near and long term.
Our revenue grew more slowly than expected.
Conversely, our bottom line results, profit margins and cash flow are excellent and ahead of expectations.
Since the beginning of our fiscal year, we have described three macro environmental factors that created uncertainty about our second half, the outcome of the election, the status and outlook for the federal budget, and the course of the COVID-19 pandemic.
Let me talk specifically about how those are playing out on the demand front, on the supply front and the impact on revenue and profits.
Underlying demand for our services and solutions remains quite strong.
In the third quarter, we saw delays in some procurements in the intelligence market, largely due to the pandemic.
And in the civil market, we saw movement to the write on awards and even some pullback on funding, which we believe is due to the turmoil surrounding the presidential election.
These shifts in procurements and funding were greater than we anticipated and greater than we normally experience during a change in administrations.
We expect these dynamics to be temporary with a return to more typical market rhythms over the next six to nine months.
Secondly, on the demand side.
I'll note the reduction in billable expenses in comparison to our third quarter last year.
We have said previously that billable expenses are unpredictable and not a significant source of profitability.
The third quarter drop-off was partially due to COVID and is another dynamic that may last for a couple more quarters.
Turning now to the supply side.
There were two factors in play.
The first was a fast return to more historical productivity rates.
During the first half, we spoke of meaningful jump in productivity because of high retention and low use of paid time off.
We always knew that was temporary.
Our expectation was that we would see a gradual shift to typical patterns as COVID vaccines rolled out.
Instead, we saw a quick snapback to more normal, albeit lower productivity levels in November.
Early indication is that our fourth quarter productivity levels may remain closer to historical norms.
Also in the third quarter, the combination of lower-than-desired recruiting rates and the strategic divestiture of a small defense contract led to a sequential decline in headcount.
As productivity declined in the first half, we were comfortable with slower headcount growth.
But with the snap back to normal levels, we need to accelerate recruitment.
We have already ramped up and expect to see improvement in three to six months.
Shifting to our other key metrics.
Let me highlight the strength of our margins, bottom line and cash flow.
While the reduction in billable expenses helps margins, our over performance at the bottom line and in cash flows is primarily driven by our strong execution of the business.
Despite the challenges of the past year, our team has remained focused on the fundamentals that drive our performance, high-quality client delivery, smart capture of new business, targeted cost management and continued investment in our differentiators, especially our people.
As a result, we have made our business leaner and more competitive, enhanced our brand in the market for talent and doubled down on our growth drivers, all while delivering outstanding value to shareholders and strengthening our balance sheet.
We expect both the headwinds and tailwinds I just described to be with us for the next few months, and that is reflected in our updated full-year guidance, which Lloyd will talk through in detail.
In addition, noting our confidence in the business, we are pleased to announce a $0.06 increase in our quarterly dividend and an increase in our share repurchase authorization, which will continue to support our ongoing share repurchase program.
We are proud that through all the challenges of COVID, social unrest, natural and man-made disasters, budget uncertainty and the most difficult election and postelection period in our lifetimes, Booz Allen is on track to deliver another year of growth and value creation.
And we also know we have some work to do.
As the fourth quarter gets under way, the leadership team has prioritized four specific areas.
Converting a rich opportunity pipeline into awards and revenue as quickly as the market permits, ramping up recruiting to take full advantage of growth opportunities, continuing to reshape our intelligence portfolio to drive growth and maximizing value creation from our very strong balance sheet by deploying capital against strategic opportunities such as a recent investment in Tracepoint and other levers of shareholder value creation.
After that summary of our near-term performance and priorities, let me take the discussion up a level and put it in a fuller context.
My leadership team and I are confident and optimistic about the direction of our business and the meaningful difference our people continue to make in support of client missions.
COVID vaccinations are under way, a federal budget is in place, and the new administration has hit the ground running.
We view these as important stabilizing forces in the overall economy and in our market.
The President has nominated an experienced team of leaders to execute the business of government.
They have clear agendas and understand the value of using technology to accelerate mission.
Inside Booz Allen, even as we focus on day-to-day operational excellence, we continue to plan for the long term.
Our overriding objective is to expand and strengthen our unique market position at the intersection of technology, mission and consulting.
We do that by staying close to our clients, anticipating what they will need next and investing in the right talent and capabilities to advance missions.
The investments we've made to grow and reshape our portfolio over many years, are both driving today's performance and bolstering our prospects for the future.
For example, we believe we are the largest provider of artificial intelligence services to the federal government with 60% year-over-year revenue growth in our AI services portfolio, albeit from a small base.
This is an addressable market that we expect to increase tenfold in the next five years and we are in the pole position to shape it.
We also support key federal agencies that form the epicenter of US cybersecurity across the civil, defense and intelligence domains.
With our ranking by Frost & Sullivan as the leading provider of cybersecurity services in North America, we view ourselves as uniquely positioned to both help the nation and capture opportunity in this critical area.
The new administration is already signaling renewed focus on cyber in the wake of the solar winds attack.
We're also building scale and depth in 5G and in the next-generation tech stack.
A 5G network requires the integration of hardware, software, IoT devices, security, analytics and emission insights, which plays to our strengths and our brand in the federal market.
We're standing up a 5G lab to support research and development.
We have partnerships with leading 5G technology companies and we are prototyping integrated capabilities.
These key technology areas and others from edge computing to digital warfare to cloud solutions and open data platforms, to immersive technology and human performance.
They all inform our thinking as we develop our next strategy.
We continue to make good progress and look forward to sharing our strategy with you later this year, along with an updated multi-year financial outlook.
I'll make one final important point before giving the floor to Lloyd.
With less than one-quarter remaining in the three-year time horizon of our investment thesis, we are on track to deliver greater than 80% growth in ADEPS against an already ambitious 50% goal we originally set in June of 2018.
Even in the most turbulent times, our firm has translated its differentiated market position into high-quality performance and shareholder value, as expected of an industry leader.
On the strength of this performance and with our purpose and values as a guide, we will continue to succeed and strengthen this institution over the short, medium and long term.
Lloyd, over to you for additional perspective on the third quarter and our outlook ahead.
As we approach the end of our 2021 fiscal year, a year of unprecedented challenge, we are proud of how well our people have consistently executed on our clients' most important missions.
As Horacio mentioned earlier, in outlining our 2021 annual operating plan, we identified three major sources of uncertainty, the November election, the budget outlook and the COVID-19 pandemic.
After an exceptional top-line performance in the first half, helped by unusually strong staff utilization, we expected slower growth in the second half as PTO trends began to normalize.
We also anticipated the potential for a slowdown in award activities following the November presidential election.
We factored these elements into the annual guidance we provided at the end of the second quarter.
However, we did not correctly anticipate the timing and magnitude of the top-line impact of those dynamics.
Our cost management efforts to date enabled us to hold the line at adjusted EBITDA.
I'll now run through our third quarter results.
Revenue and revenue excluding billable expenses increased 3% and 6.2%, respectively, compared to the same quarter last year.
Revenue growth was primarily driven by solid operational performance, indicative of continued demand from our clients, tempered by lower billable expenses largely attributable to COVID.
Let me give you more color at the market level, starting with the demand side.
Revenue in defense grew 6% year-over-year, against a challenging third quarter comparable.
I'd note that revenue excluding billable expenses, continued to grow strongly, but our defense business carries the bulk of Booz Allen's exposure to billable expenses.
These were lower than expected in the third quarter due to less travel during the pandemic, and they were elevated in the prior year period due to significant materials purchases on aircraft programs.
As Horacio mentioned, underlying long-term demand for our services and solutions remain strong, but we did experience lower-than-expected starts on existing defense contracts and a few large awards slipped to the right.
We expect these to be resolved over the next few months.
In civil, revenue growth was 7% in the third quarter.
Here, we believe the chaotic postelection period shifted some awards to the right.
In addition, there was a pause on a large cyber program due to funding availability.
We expect the pause to have a larger impact on the fourth quarter.
But given that it is a critical cybersecurity program for the customer, we believe work will ramp up again longer term.
Lastly, I would note that we expect increasing demand in civil as the new administration starts implementing its priorities.
Revenue from our intelligence business declined 3% in the third quarter.
Our focused efforts to reshape that portfolio continue, and we expect to see stronger performance in FY '22.
Lastly, Q3 revenue in global commercial, which accounted for approximately 3% of our total revenue, declined 35% year-over-year.
The drop was driven by our international business based in part on market dynamics, but also due to our own decision to shift our strategic focus to our cyber business in the US in the port of that, we made a minority investment in Tracepoint, a digital forensic rand incident response company serving clients in the public and private sectors.
We are excited to partner with Tracepoint and see a significant opportunity to cross-pollinate with Booz Allen's own digital forensics expertise.
That covers the demand side.
Now let me step through the supply side dynamics as well as our expectations for the rest of the year.
In the first half of the year, given the limited ability to travel during the pandemic, our employees took very little time off from work.
We encouraged our people to take PTO in the interest of their personal health and expected a gradual return to normal productivity levels as a result.
Instead, PTO utilization returned back to historic levels in November, and we believe that trend may continue.
We note that the timing around the rollout of a COVID vaccine could have a material influence on PTO utilization.
Regarding headcount, while attrition remained low, we did not add as much headcount in the third quarter as we had planned, in part due to a strategic contract divestiture.
Our hiring needs were somewhat lessened in the first half of the year due to unusually strong staff productivity, but we intend to pick up the pace on recruiting.
This will take us some time to address, but we expect to be back on track by early next year.
We ended the quarter with 27,566 employees, an increase of 390 or 1.4% year-over-year.
Excluding the impact of the 110-person workforce transferred as a part of the army-related contract divestiture, we would have ended the quarter with 1.8% headcount growth year-over-year.
On Slide 7, you'll see that total backlog increased 6.1% to $23.3 billion.
Funded backlog was up 2.8% to $3.6 billion, unfunded backlog grew 12.5% to $6 billion and price options rose 4.3% to $13.7 billion.
Our book-to-bill for the quarter was 0.3 times, and our last 12 months book-to-bill was 1.2 times.
The relatively low quarterly number is attributable to two factors.
First, seasonality following our historical pattern, and second, the aforementioned delay in awards.
Note that we continue to expect volatility in quarterly book-to-bill as we pursue larger and more technically complex bids.
Moving to the bottom line.
Adjusted EBITDA for the third quarter was $205 million, up 7.7% year-over-year.
Adjusted EBITDA margin was 10.8%.
Adjusted EBITDA performance was driven by strong execution across the portfolio and ongoing prudent management of discretionary expenses.
Adjusted EBITDA margin was also impacted by lower billable expenses.
Third quarter net income and adjusted net income grew 29% and 28% year-over-year to $144 million and $145 million, respectively.
Diluted earnings per share and adjusted diluted earnings per share each increased 30% to $1.03 and $1.04, respectively.
The increases were due to solid operating performance and the release of a large tax reserve stemming from our previous Aquilent acquisition in fiscal year 2017.
This reserve release was factored into our previous guidance.
We generated $233 million in operating cash during the third quarter, an increase of 133% over the prior year.
Cash ended the quarter at $1.3 billion.
Exceptional operating cash flow was driven by the overall growth of the business, continued strength in collections and reduced payables attributable to cost management.
These first three quarters of cash generation represent our strongest year-to-date performance since our IPO, a truly phenomenal result.
Capital expenditures for the quarter were $16 million.
This year, we continue to prioritize technology and tools that enable a virtual work environment.
Also, we are nearing the implementation of our next-generation financial system, which will support the company's growth into the future.
During the quarter, we repurchased $27 million worth of shares at an average price of $83.76 per share.
Including dividends and the minority investment, we deployed a total of $142 million in the third quarter.
As Horacio noted, our share repurchase authorization has expanded.
As of January 26, with the $400 million increase, we now have a total authorization of $747 million.
In addition, the company has authorized a dividend of $0.37 per share payable on March 2 to stockholders of record on February 12.
With $1.3 billion in cash on hand, we continue to view our balance sheet as a strategic asset.
We remain committed to preserving and maximizing shareholder value through patient, disciplined capital allocation.
We see ourselves as well positioned to act quickly on opportunities as they arise.
Now on to our updated guidance.
Please move to Slide 9.
While revenue growth was slower than expected, we are proud of our team's ability to manage the business and gain efficiencies amid the many macro environmental challenges of this fiscal year.
Margins, ADEPS and cash flow are all trending above our expectations.
In our view, this speaks to the strength and resilience of the Booz Allen business model.
In the fourth quarter, we are focused on fundamentals.
We plan to continue investing in our people and our long-term growth initiatives.
We will continue to recruit aggressively to sustain long-term organic growth and intend to reward our people for their strong execution through the first three quarters.
We are also nearing implementation of our new financial system, which will further support our business leaders.
Our revised guidance reflects these efforts, in addition to the third quarter performance and trends I just outlined.
Let me run through the numbers.
For the full fiscal year, revenue growth is now expected to be in the range of 4.8% to 6%.
Our revised range reflects $150 million to $250 million of revenues tied to the second half uncertainties we outlined earlier, the election, the budget and COVID-19.
They break down as follows.
Temporary programmatic shifts of $50 million to $100 million, $50 million of risk tied to a material incremental step down in staff utilization, and lastly, lower than forecast billable expenses of $50 million to $100 million, largely from lower pandemic-related travel.
For your models, we also note that fourth quarter working days will have a difficult year-over-year comp because last year was a leap year.
We expect adjusted EBITDA margin for the year to be in the mid-to-high 10% range.
We have raised the range for adjusted diluted earnings per share by $0.10 to between $3.70 and $3.85.
On operating cash, we have raised the range by $25 million to between $625 million and $675 million for the full year.
And finally, our outlook for capital expenditures is unchanged at $80 million to $100 million.
We have confidence in exceeding 80% ADEPS growth over the three-year period.
This growth is supported by 6% to 9% annualized revenue growth since fiscal year 2018 at mid-to-high 10% EBITDA margins in fiscal year 2021.
We also are proud of our option value initiatives over the period and our progress toward $1.4 billion in capital deployment.
I am pleased to say that we are well positioned to exceed our three-year ADEPS growth goal organically while, retaining the strongest balance sheet in the history of the company in spite of the turbulence of the last three years.
As we move toward our next investment thesis, I believe that the people of Booz Allen will rise above the challenges that emerge in order to continue meeting the high standard our shareholders have come to expect.
We remain confident in the long-term trajectory of the business and focus on maintaining our role as the industry leader.
Operator, please open the lines.

user
quarterly diluted earnings per share of $1.03.
expects adjusted earnings per share growth to exceed three-year investment thesis ending with fiscal year 2021.
qtrly adjusted diluted earnings per share of $1.04.
adjusts full year guidance at the top and bottom line.
increased quarterly dividend by $0.06 to $0.37 per share.
sees for fiscal 2021 revenue growth in 4.8 to 6.0 percent range.
sees fiscal 2021 adjusted diluted earnings per share $3.70 - $3.85.

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