Curt Riggle - Booz Allen Hamilton Holding Corp. Horacio D.

Rozanski - Booz Allen Hamilton Holding Corp. Lloyd W.

Howell - Booz Allen Hamilton Holding Corp.

Amit Singh - Jefferies LLC William R. Loomis - Stifel, Nicolaus & Co., Inc.

Trevor Romeo - William Blair Cai von Rumohr - Cowen and Company, LLC Jonathan Raviv - Citigroup Global Markets, Inc. (Broker) Edward S.

Caso - Wells Fargo Securities LLC Brian Ruttenbur - Drexel Hamilton LLC

Great. Thank you, Kaylee.

Good morning and thank you all for joining us for Booz Allen's second quarter fiscal 2017 earnings announcement. We hope you've had an opportunity to read the press release we issued earlier this morning.

We have also provided presentation slides on our website and are now on slide one. I'm Curt Riggle, Vice President, Investor Relations, and with me to talk about our business and our 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 that 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 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 2017 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 included an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our second quarter fiscal 2017 slides. It's now my pleasure to turn the call over to Horacio Rozanski, our CEO, and he will start on slide three.

Thank you, Curt. Good morning, everyone.

Thanks for joining us. Today, we're very pleased to report that in the quarter ended September 30, the people of Booz Allen turned in another solid performance.

Their success in capturing opportunities and delivering high-quality mission-critical work to clients continues to support our accelerating growth and our strategy for the future. The fundamentals of our business are strong.

We're seeing and capitalizing on healthy demand for clients, we're managing our operations with agility, and we're leveraging substantial recent investments in growth areas to bring clients comprehensive solutions that combine our consulting expertise and broad mission knowledge with the most advanced technologies. As we begin the second half, we're on track to finish fiscal year 2017 as planned and we remain confident that our long-term strategy will lead to sustainable quality growth.

Let me discuss briefly an item that's been in the news. As you know, a former employee of Booz Allen is under criminal investigation.

As we have communicated previously, we fired the employee as soon as we learned of his arrest and have been cooperating with the FBI investigation. In the week since the government made the case public, we have been reaching out to clients and other stakeholders.

They're supportive of our efforts to cooperate with the government's investigation and to keep them informed, and we intend to stay close in touch with them as we always do. To-date, there has been no material impact on our business from the alleged criminal actions of this former employee.

Booz Allen has been built on a 100-year record of client service, dedication to excellence and adherence to the highest ethical standards. We are extremely proud to support our country's civil and national security missions, and we take the trust that all our clients place in us very seriously.

We work to earn it day-in and day-out. In addition to cooperating with the government's investigation, I have asked former FBI Director, Robert Mueller, to conduct an external review of the firm's security, personnel, and management processes and practices.

If there are things we can learn, we want to know about them. Constant improvements is in Booz Allen's DNA.

Every day, we help clients find a better way. So we strive to apply that same approach to all aspects of our own operations in good times and in challenging times.

As I have often told you, we concentrate on being agile and proactively manage the things we can control. For the nearly 23,000 people of Booz Allen, that means delivering our best work to clients, serving our communities, and effectively building and executing the business to create value for investors.

We will maintain our focus on all of those things. For the balance of the fiscal year, we will continue to push forward with our near-term plan for FY 2017 and our long-term strategy for growth.

We will continue to ramp up our work on contracts and hire the talent we need to deliver what we have promised to clients. We will keep pursuing opportunities that apply the full range of our expertise, and we will further invest in capabilities, markets and people.

Also, we will manage the business with one foot in the present and one foot in the future. Those are the things that our clients and shareholders rightly expect, and they will help Booz Allen and our people continue to thrive.

With that, let me turn the call over to Lloyd for a detailed discussion of our second quarter results.

Thank you, Horacio. Please turn to slide 4.

I'll start with a few big picture points. First, with half a year behind us, we feel good about where we are.

As we've discussed in the past, we run our business on an annual basis. To-date, the company's financial performance aligns well with our FY 2017 plan.

Second, we're managing operations with flexibility so that we can anticipate and adapt to changes, mitigate against risk, and take advantage of opportunities as they arise. Third, the market continues to signal demand and is rewarding us for our differentiation.

Or put another way, clients across our diverse business areas recognize that Booz Allen offers a valuable combination of skills and knowledge that can help solve their most pressing problems. And lastly, our financial results demonstrate that investors can count on us to set a plan and execute against it with discipline and focus.

We do what we say we'll do and in the near-term and over the long-term. Let me run through the specifics of our second quarter.

Please turn to slide 5. At the top line, we recorded our third consecutive quarter of healthy organic revenue growth, 5.5% above the same period last year.

We are moving out strongly against the backlog, hiring and deploying additional people, and increasing productivity in response to client demand. As you know, we have been working hard to recruit and hire talented professionals in a very competitive market.

Hiring people with the right skills and deploying them quickly onto contracts is of course essential to support revenue growth this year. But just as importantly, it would enable the year-over-year acceleration in growth that we are aiming for.

During the second quarter, thanks to a lot of effort put forth by leaders across the business, we increased head count by more than 230. We're bringing on people with expertise in all of our functional areas and we are pleased with the increases we are seeing in high demand technical skill set.

I would note that the year-over-year increase in head count exceeds 500. That growth, along with improved billability and an increase in billable expenses, drove the year-over-year revenue gain.

For the full fiscal year, we expect billable expenses to be between 29% and 30% of gross revenue, and our efforts to increase head count will continue throughout the year. Moving to the bottom line, the results reflect both improved revenue and better management of our indirect costs since the beginning of the fiscal year.

When compared to the prior year period, adjusted operating income for the quarter was up 11%, adjusted net income increased 20% and adjusted EBITDA rose 9.3%. Adjusted EBITDA margin was 9.7% and adjusted diluted earnings per share for the quarter was $0.46.

Backlog is another indication of our tactical and strategic success to-date, as well as prospects for the future growth. As of September 30, our total backlog was a record $13.6 billion.

The total represents an 8.7% increase over last year and that had been our highest backlog total in nearly three years. You will recall that a year ago in the first and second quarters, we worked very hard to win new business after transitioning off of a large long-term contract.

To have exceeded that effort a year later is a great accomplishment for us. It demonstrates clearly that our clients value the quality of our people and the differentiated solutions we offer.

I will also point out that the growth is more evenly distributed across funded and unfunded backlog and priced options. This is our second consecutive quarter, in which both funded and unfunded backlog rose.

Funded was up 2.7% from the year ago level and unfunded was up 13.5%. Priced options were 9.6% higher than the same quarter last year.

Book-to-bill was 2.17 times, and keep in mind, that number follows the best first quarter book-to-bill we have had in five years. Our opportunity pipeline also remains healthy with contract durations continuing to lengthen.

We are intently focused on capturing opportunities that apply our consulting expertise and the investments we've made in system delivery, analytics, cyber security and engineering. As we succeed in those efforts, we're building a rich portfolio of services and solutions to scale across the business so that we can sustain high-quality growth into the future.

Next, let's turn to cash. Our cash position continues to improve due to both revenue growth and better cost management.

In addition, our cash position at the end of the second quarter reflects strong conversion of revenue to cash and a reduction in required tax payments in the quarter. As a result of these differences from last year, net cash provided by operations in the first half of fiscal year 2017 was 145% higher than in the first half of last year.

We are also adjusting downward our expectations for capital expenditures for the full fiscal year and now anticipate CapEx in the range of $55 million to $65 million. As a result, we now expect our adjusted net income to free cash flow conversion rate for the full fiscal year to be in the range of 95% to 105%.

Before opening the lines for questions, I will note that the company has authorized a regular dividend of $0.15 per share, payable on November 30 to stockholders of record on November 10. As you saw our earnings release this morning, we are raising the bottom end of our guidance ranges for the year.

The new ranges are shown on slide six. We expect gross revenue to increase in the range of 3% to 5%, diluted earnings per share to be $1.63 to $1.70, and adjusted diluted earnings per share to be $1.68 to $1.75.

With that, I'll hand it back to Curt and then we'll move on to questions.

Thank you, Lloyd. Kaylee, at this point, can you provide instructions for the question-and-answer portion of the call.

Hi, guys. Thank you for taking my question and great quarter.

So, if I look at your bookings in the last 12 months, they're really strong. So I feel that you have the bookings to drive even the upper end of your guidance range.

And this quarter, the head count growth was very strong. So where you stand on the head count, do you think at this point you're adequately staffed to even come at the upper end of the guidance or to achieve that you need to add more people?

Amit, thanks for the question. We are always looking for talented candidates, and as I said in previous discussions, where we end up in our range is going to be a function of the number of folks that we bring onboard.

So, said another way, we are staffed adequately to execute on the opportunities we have, but to complete the conversion of backlog that we have, we need to bring on more folks in the technical areas that we've invested in over the past three years and we remain confident in our ability to do that.

All right. Perfect.

And just quickly on bookings, was there anything out of the ordinary, any big recompete that came in the quarter or slipped from the quarter to the next?

No. We have thousands of contracts and task orders that comprise our business.

And so our success year-to-date is a continuation of that. So things that we are pursuing in terms of recompetes, we were pleased with the results of that and we continue to take share of the market as well.

All right. Perfect.

Great. Thank you.

Hi. Thank you.

Good quarter. A couple of questions.

One, what was the organic growth? Because I think you still had a small bit in there from an acquisition.

And then second on hiring, just another staffing question. So your hires are up 1% about sequentially and year-over-year, but revenue is higher.

You talked about increased utilization. Was that people that you had that weren't billable that were getting training or you've had a bench previously?

Why aren't we seeing hiring more in line with what the overall revenue growth is? Thanks.

Sure. Let me maybe take them in reverse order.

We purposefully raised our billability across the institution, as we said previously, to begin to convert on the backlog that we were able to build. And so by our different business sectors, it's not necessarily the same billability percentage, but the net result was an increase across the board.

And that was deliberately planned. Similarly, with the hiring as we begin to be at a net positive position, what we're focused on is really bringing on the skill set that will be reflective of the work that we've developed and the work that we need to convert.

And so we are more interested in the quality of the candidates that we're bringing onboard, especially at this point as we accelerate growth. And then, when it comes to – maybe I'm forgetting the very first question that you asked.

If you wouldn't mind repeating it, that would be great.

The organic growth for the quarter, excluding the small deal you did.

Hey, Bill, this is Curt. Just on that point, the deal that we did was a non-material deal.

And so we have not broken out organic/inorganic, and I will tell you that at this point it's fully integrated. So almost impossible to do.

Okay. Thank you.

Thank you.

Hi, guys. This is actually Trevor Romeo in for Tim here today.

Thanks for taking questions.

Sure.

First, just any more color on what areas of the business you're seeing particularly strong contract wins?

We're actually very pleased that it's been across the board. The business that I managed prior to this role was our civilian federal business, now managed by – led by Karen Dahut.

We pivoted to what we thought were the priorities of the country and that has proven to be effective in the growth that we've seen there. Similarly in our defense market business, led by Joe Logue, they have been working very closely with our clients and have seen a very strong business capture season as well.

And then lastly, in the intelligence market, we worked on very mission-oriented engagements, and as a result, our clients have rewarded us for that. But across the board, the entire portfolio has grown as expected, given our plans for this fiscal year.

If I can build on that, it's Horacio, what I would also say is we are very pleased – about four years, five years ago, we deployed a strategy we called Vision 2020 to drive certain elements of our portfolio, not in terms of which clients but in terms of which capabilities we were bringing and augmenting and investing in. And we are seeing great returns across that from modern software development techniques like Agile and DevOps to the work we're doing on advanced analytics and data science, to some of the leading edge cyber work that we do for clients across all of our business, and it's engineering.

I could keep listing them. When you add all of that up, we're seeing great success and great growth, and growth that's on strategy, which is, I think, what makes us feel optimistic about the future growth potential, not just what happened in the quarter.

Great. Thanks.

And maybe just one more quick one. With regard to the billable expenses, I think you mentioned it's like maybe 29% to 30% of revenue for the year.

Is there anything in particular that's driving that? It seems maybe a little higher than historical levels.

And do you maybe longer term see that kind of trending a little higher?

Yeah. I mean it's really a reflection of the markets that we compete and deliver in.

As I said for the full year, we expect it to be 29% to 30% of revenue and it really is a continuation of what we talked about in the past. Our clients have required us to have small business set-asides as a prime, but we're doing that and the result is the percentages that I've referenced.

In terms of the future, my crystal ball is probably as good as anyone else out there. We are going to continue to monitor it and manage it as best we can, but this is the business we are in and these are the clients that we want to support them and their most critical missions, and so this is a result of the market that we lean into.

Okay. Perfect.

Thanks for taking my questions, guys.

Perfect.

Yes. Thank you very much.

So a quick one. Tax rate was lower this quarter.

What would you now expect for the year?

I think we're still planning on it being at 39.3% for the year.

Got it. Thank you very much.

And then on the billables, because the billables are basically labored or materials done by others, does that mean that you really to get – so if you look at revenues ex-billables, which is a better metric to compare with your direct labor growth, that would seem to suggest with a little bit less direct labor growth, you could achieve the upper end of your revenue estimate given that the billables are higher for the year?

Yeah. I appreciate the calculation.

When it comes to how we are looking at where we'll end up within the range, we are focused on how many quality folks we can bring onboard. I think that is important both the near and long term.

As Horacio has said, we are at the same time keeping a foot in the present, we're also focused on the future. And for us bringing on the right capable skill set with the right folks who will have a long career at Booz Allen, that's what we're looking at first.

And then we expect that if we're doing well there, that will end up putting us within the range that I put out previously. And if we do it better and better, then we'll see where that lands us, but that's what we're focused on.

Terrific. And the last one, so if we go back to the Mr.

Martin incident, this is the second incident, obviously, you guys have had and while I know that OPM really opines on the background, obviously they are your employees so that there is some potential impact on you, or I guess there could be. While you haven't seen anything to-date, are you nervous that this could have some ramifications and any preliminary thoughts – I mean I think terrific that you have Mr.

Mueller doing the investigation, but any preliminary thoughts of what sort of things you might have to change or might want to change?

I'll take that one. What I can share with you is we are in constant communication with all our clients.

We have shared with them the information that we can share. They've been very supportive of the way that we proactively supported the FBI investigation and all of the requests of us.

And this outside review by Director Mueller is simply the right thing to do for us. It's a way for us to get better.

When I sat down with the Director, I made it clear that he has his broadest scope as he needs to have and he can look anywhere he needs to look we want to know what he finds and we want to know what we need to do to continuously improve in this area. So there are no limitations or boundaries to what he is going to look at.

Thank you very much.

Hey. Good morning, guys.

Good morning.

Good morning.

Lloyd, I was wondering if you could just address how those higher billables impact your ability, if at all, to get that to around 10% adjusted EBITDA margin?

Well, in short, with a higher billability and focus on delivery, we're able to sort of generate the DL. At the same time, we are also able to – we have been able to manage our indirect spending that'd gotten out of plan last fiscal year.

So the combination of the two is creating the margin improvement that we are seeing now in the business. And keep in mind, I forecasted out for the entire year.

So over the course of the year, there'll be periods where we may decide to invest or to spend because it's the right thing to do. So we expect margin improvement, as I've said in the past, to occur over the course of the entire year, and we are beginning to see that.

But the higher billability plus the management of our indirect spending has contributed to the margin improvements that we're experiencing.

And then on that topic, just heading into second half, what is your pipeline for spending and investments look like, just because it seems like you're maybe tracking a little bit ahead on the margins. Is that still scheduled to pick up?

Yeah. I may not answer your question as directly as you'd like, but at the beginning of every fiscal year when we make our investment decisions, we do it with the expectation that our colleagues will be spending over the course of that year.

So it's not a seasonal type of deal. And as a result, what I do is I look at the totality of the year and are we in alignment with our spend as well as seeing the margin improvement that we expected to see.

And at this point in the year, we're exactly where we had planned and we're pleased with the results that we see. So if the question's that regarding a difference in the second half versus the first half, we took that into account at the beginning of the fiscal year when we did our planning.

And that's not something that I or the team track necessarily.

Thanks, guys.

Thank you.

Hi. Good morning.

Good morning.

Congrats on a solid quarter. Were there any awards of note that you won last quarter, but are not out of the protest period, so would show up in the December quarter?

So, Ed, this is Curt. Within the backlog that we've reported, as you know, we don't report – we don't add the contracts under protest in that number.

I will tell you that it's $345 million of contracts under protest that are not included in our backlog. So we'll see how time plays out with that, but that's an idea of the scale of what's not included.

Okay. And my other question is, is there any unusual level of award fees in the quarter that may have helped or hurt margins relative to, say, a year ago?

No. Not that we've seen.

Great. Thank you.

Thank you.

Yes. Thank you very much.

Anything unusual that you see happening near year-end in terms of backlog or bookings that would happen, given that it's a presidential election year, as we all know, do you see anything dropping more so or less so in this third fiscal quarter?

I'll try and take that. I think we have not seen our clients either slow down or speed up because of the presidential election.

They're focused on mission, they're driving against their missions, and we're supporting them that way. As you know as well, we don't manage the business quarter-to-quarter.

We manage for the long-term. And that's what we're focused on – and that's what we're focused on doing with our clients.

So we don't expect anything either extraordinary either way as a result of the election. We'll all go out and vote.

We'll listen carefully to what happens. And then, we will look for ways to align ourselves to the country's agenda to make sure we're supporting the right priorities.

The only thing I would add is we do very little policy work, which is usually subject to the political wins of the country. As we have long stated, our invested areas – areas we've invested in, skill sets we're looking for are politically agnostic.

And the programs we support, the missions of our clients are also politically agnostic. So in terms of the results of the election, to just echo what Horacio just said, we're not anticipating a significant impact to our portfolio or the work or our future strategy.

Okay. And then just second question real quick on capital deployment.

Any changes to capital deployment, is it primarily dividends and what are your priorities in rank order right now, and have they changed?

The topics, the areas on our list remain the same, but as we are pivoting to stronger financial performance, as I mentioned in my opening comments with the improvement in our cash generation, we are evaluating those priorities – the priorities that we currently have. So at this time, I am not prepared to give you a different ranking than what I've done in previous quarters, but you should know that we are looking at it and we'll adjust accordingly given our financial performance.

Thank you.

Thank you very much and thanks everyone for your questions. I hope Lloyd and I have made clear the strong fundamentals of our business and the optimism we feel about Booz Allen's people to grow.

This is a conversation that is largely about numbers, and so it's very difficult to convey the energy, imagination and dedication of the people of Booz Allen, while we do this. But they are what drives our firm forward year-after-year.

I've had the great privilege to spend more than 24 years here. Even after all that time, I'm constantly amazed and inspired by what our people do – their values and expertise, their dedication to clients and our country, and their deep sense of purpose.

There's a true spirit of service and generosity inside Booz Allen and deep desire to solve problems and to make the world a better place, and you see it in how our people approach their work and their commitment to each other and the communities where they live. Just to give you an example, this summer, we had 320 interns in nine cities participating in our revamped internship program.

It was a fun, creative and competitive program that had 6,000 applicants this year. The interns work in teams on projects that aim to solve tough clients or societal problems.

This year's projects including use of virtual and augmented reality to alleviate chronic pain, analyzing data to understand the urban plight, creating an app to help military commanders access open source information in real time and building an executive dashboard to track the health of an organization, a very broad range of topics. At the end of the summer, we selected a winning team.

This year's winner developed wearable technology that uses GPS and 3D cameras to help the blinds to navigate more independently. We're now looking to form a partnership with the National Federation of the Blind to take the project forward.

I've taken you through this program in some detail because it's the perfect microcosm of Booz Allen and what we are all about. It really captures our commitment to solving problems in new and powerful ways.

That is the Booz Allen I know. And so I'll close by simply thanking the thousands of people who not only ensure the firm's success from quarter to quarter, but more importantly who show the best of our firm to clients, strategic partners and local communities each and every day.

Thank you, Booz Allen. Keep making us proud.

And to everyone else on the line, thank you for joining us and have a great day.