Booz Allen Hamilton Holding Corporation
Q1 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's Earnings Call covering First Quarter Results for Fiscal 2016. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions. I would now like to turn the call over to Mr. Curt Riggle.

[Curt Riggle:]

Good morning and thank you, all, for joining us today for Booz Allen's Fourth Quarter Fiscal 2016 Earnings Announcement. We hope you have had the opportunity to read the press release that we issued this morning. We have also provided presentation slides on our website, and we're now on Slide 1. I'm Curt Riggle, Vice President, Investor Relations, and with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Kevin Cook, Executive Vice President and Chief Financial Officer. As shown on the disclaimer on Slide 2, 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 first quarter and full-year fiscal 2015 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 the 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 first quarter of fiscal 2016 slides. It's now my pleasure to turn the call over to Horacio Rozanski, our CEO, and he will start on Slide 3.

[Horacio D. Rozanski:]

Thank you, Curt and good morning everyone. Today, Kevin and I will take you through our first quarter fiscal year 2016 results and how our performance aligns with our long-term growth strategy as well as our plan for the fiscal year. I'll also talk to you about our innovation agenda an exicting part of the vision 2020 growth strategy. Those of you who are most familiar with us know that Booz Allen’s success overtime has ingrounded in two things long-term focus and strong day-to-day execution. We establish above the guide sort of decision-making, we define specific goals for the near-term and then we relentlessl and successfully execute against those goals. So that’s what we continue to do, we are managing our business todays to drive sustainable quality growth and create value for our clients, our people and our shareholders. We entered fiscal year 2016 with a plan to frontload some cost so that we can capture increasing opportunities into this healthier market, our first quarter results reflect the execution of that plan. One quartter into the fiscal year, our pipeline is healthy, and the stabelized mareting is signaling demand. Proposal activity has picked up and we’ve built a bench so that we can capitalize in the opportunities that the market is presenting. As always, our day-to-day focus is being an essential partner to clients delivering solutions that are right at the center of their most critical missions. At the same time, under our growth strategy we are investing for the future in new businesses, capabilities and talents, so that we have lasting differentiated in profitable position in key areas. Our growth platforms are maturing nicely. I am very excited by the way; our team is [rearranging] (ph) towards growth, sharpening our competitive edge and expanding our clients’ perception of what Booz Allen and do for them. My first hand discussions with clients across all of our markets confirm that they appreciate the value our people overly bring and view our growth platforms as additional sources of differentiation. So in summary, we remain on track on deliver on the guidance we provided two months ago, even if there are some ups and down as the year progresses, equally important with investments we’re making, we are positioning ourselves very well for next year and beyond. Against that backdrop, I’m pleased to announce today the issuance of a regular quarterly dividend of $0.13 per share payable in August 31 to shareholders of record on August 10. I’ll let Kevin provide the details on our first quarter results but before turning to him I want to say a few words about the SURVIAC transition. As you know, we have been working to transition a significant amount of the work from the SURVIAC contract to new ordering vehicles, because the contract expired only three weeks ago, the transition is still playing out as we speak. What I can tell you at this point is that the efforts of the team have truly been outstanding. Our team led by Joe Logue, our Defense and Intelligence Group Lead and by Robin Portman has done a great job in winning new contract vehicles, transitioning much of our existing work and minimizing the impact on our people. The majority of employees that have done work under SURVIAC have been placed on new or existing contract. As we fully expected some of this transition is still in process and we still don’t have the full picture, but the part of the transition that is behind us that has gone very well. With that Kevin, over to you.

[Kevin L. Cook:]

Thank you, Horacio. I’ll begin on Slide 4, before taking through the details of the quarter, I want to underscore the point that we managed the business on an annual basis and we opened the year just as we planned. The market has stabilized to a point that clients are focused on priorities and their missions and as a result we have a solid opportunity pipeline and have seen a healthy increase in proposal activity. In our last two fiscal years we adjusted our spending pattern to create financial flexibility during the first half to position for potential uncertainty in the market in the second half. This year as a result of our confidence in the market we've made a change so that spending will be even more even throughout the year; we had pulled forward spending on proposal activities to ensure we take full advantage of our strong opportunity pipeline. We are maintaining the bench that we have built over the past year and our growth platform leaders are moving out against their plans and are on track for more even quarterly spend this year. This flatter spending profile for the year also relates to a more balanced margin profile for FY 2016 with relatively low margins in the first half and relatively higher margins in the second half as compared to the prior two years. With that please turn to Slide 5 and I’ll walk through the drivers of our results for the first quarter. Starting at the top as you saw on the press release revenue increased 2.2% year-over-year and was driven primarily by an increase in billable expenses and a headcount that was higher than in the first quarter of last fiscal year. In the quarter, we saw declines in adjusted operating income and adjusted net income, which are driven by relatively higher indirect spending in the first quarter as we planned and as we indicated would be the case on our last earnings call. Reductions in adjusted EBITDA and corresponding margin percent were driven by the same factors excluding the effect of a decrease in depreciation and amortization expense. I will also reconfirm our long-standing objective of expanding the adjusted EBITDA margin percentage by 10 basis points annually. Turning to backlog, book to bill was 0.92 times for the quarter which is up from 0.88 times in the first quarter of last year; we saw a slight increase in funded backlog and a slight decline in unfunded backlog. Turning for a moment to cash, let me highlight the four primary drivers of the decline in the balance of the end of the first quarter of fiscal year 2016 as compared to the prior year period. First cash from operations declined by $72.6 million primarily due to the timing of payments recedes during the quarter, which we expect to reverse during the remainder of the fiscal year. Second consistent with their goal of keeping share count roughly flat over time, we took the opportunity to repurchase $1.2 million shares on the open market during the quarter. This used approximately $30 million. Third our CapEx spending increased by $10 million over the first quarter of last year. The increase was released all improvements as we reconfigure our facilities footprint in the Washington DC Metro area. We expect CapEx to be $60 million to $70 million in fiscal 2016 primarily as a result of this effort. Over the long-term we still expect CapEx to run around 1% of gross revenue. Fourth, we had to $10 million increase in principle payments on debt as compared to zero in the first quarter of last year. Last year no principle payment was required as a result of our May 2014 amendment to our credit agreement. Relative to our capital deployment priorities I want to be clear that our priorities have not changed. Maintaining our regular recurring dividend pursue strategic acquisitions of capabilities that can serve as a course multiplier for organic growth, special dividends from cash builds beyond the term needs share repurchases to keep share count relatively flat over time and finally debt pay down beyond the principal payment requirements in our credit agreement. Let’s turn to Slide 6, as you saw in the press release today we are reiterating the fiscal year 2016 top and bottom line guidance that we provided on our May 21 earnings call. Horacio mentioned earlier that we are still executing the SURVIAC transition and we are very comparable with where we are in that process. We’re also confident that we will be within the estimated range of $100 million $200 million in revenue impact that we provided in May. At this point, the key variable impacting our revenue is the gap between when SURVIAC work ends and when the replacement work is awarded. Given that the contract ended on July 8 this gap and therefore the majority of the revenue impact is going to occur in the second quarter. I also want to know that given the strong demand signals we are seeing in the market it is currently our intent for the most part retain staff, who are temporarily impacted by this timing gap. This is already been factored into our annual guidance. We need to see how the tail end of the transition plays out and we expect to have a clear picture by the end of our second quarter. We planned to provide an update on the transition progress on our second quarter call in late October. For the full fiscal year 2016 we expect revenue to be roughly flat with a range of 2% growth to a 2% decline. At the bottom line for the full year we are forecasting diluted earnings per share to be in a range of about $55 to $65 and adjusted diluted earnings per share to be in the order of a dollar $60 to $70. Now, I’ll turn it back over to Horacio and he is on Slide 7.

[Horacio D. Rozanski:]

Thanks Kevin. As I mentioned that the top of the call we are focused on executing our plan for the year while investing in the future. I like to spend the next few minutes updating you on the progress of vision 2020 on a renovation agenda more specifically. Our goal flat firms include systems delivery, engineering, cyber, innovation and commercial and international markets. We already see a part of this business is delivering healthy growth and margin enhancement. Also platforms mature will reconfirming the power that comes from integrating them with our traditional strengths. We already hold the differentiated position in the federal market due to our people’s education and knowledge of our client’s mission. As well as a reputation and intellectual capital as the government’s premier consulting firm. Our growth platforms enhance these positions by expanding and extending our ability to serve clients and create more power solutions to their challenges. We’re also winning new clients in both governments and commercial because our expanded capabilities which are further bolstered by our brand reputation and our top-notch talent. Within our goal strategy and innovation agenda is a foundational platform that extends our horizontally across the firm. It supports our efforts to build more of our business to high demand areas that require groundbreaking solutions. As a background of more than two years ago right in the middle of the market downturn, we made big investment by establishing our strategic innovation group or SIG under EVP, Karen Dahut. The SIG has develop that clear on focusing innovation agenda and in relatively short period already achieved the great deal. First, we are developing new services, products and technology platforms that allows to serve clients in ways nobody else can. This include next generation technology platforms just in digital mobile, cloud and open source capabilities, data science solutions that transform the way our clients conduct our business productive intelligence towards that protect organizations from cyber and other threat, the list goes on and on. Second, we are forming a network of aliens is that’s found a whose who of technology as well as creative and innovative start-ups positioning Booz Allen at a translator who can pragmatically target this new technologies to solve key mission challenges. And third, and importantly we’re transforming our own culture, making ourselves even more attractive to a new generation of talented who posses some of the most sought after skill sets. We believe that the result of these investments will have long-term extraordinary impact in our business. But the results are in just for the future. Our innovation agenda is helping drive growth and profitability today. Let me take a moment to describe the sources on the near term value. First taking innovation to clients, create what we call sticking us meaning and solidified some expense our work them in a competitive market for instance. Booz Allen earlier this year won a three-year $39 million task under the department of Homeland Securities Continues Diagnostic and Mitigation program known as CDM, it provides tools and services to help federal civilian agencies identify several security vulnerabilities more quickly. Through the program we are supporting DHS, the general services administrations, Federal systems Integration, and the management center, and same departments and agencies included in 63 organizations within them. Each with unique names. Clients will have the ability to make decisions to prevent and mitigate several threats more quickly with a better understanding of the risks. Our productive intelligence platform was not just a major innovation but was also a major differentiator in willing this work and we are using the same approach without our government and commercial clients to do things like five financial crimes access in cyber threats and protect facilities and other infrastructure. Second benefit over our innovation agenda is that allows us to create new businesses and placed long-term bets on truly groundbreaking technologies. Other use to work of Epidemico Inc, the small health analytics from we acquired last year as an example. Epidemico was working with our clients GlaxoSmithKline and the U.S. Food and Drug Administration to develop a platform that tracks adverse outcomes for drugs and drugs [seeds] (ph) using social media sources such as Facebook, Twitter, and online health forums. This approach enables near real time identification to adverse events, which today can take months to identify through traditional channels. We are taking this capability to other commercial and government clients who see great potential from benefit from decision making with data mine by Epidemico and this capabilities clearly applicable to other market segments such as food, safety, and automotive. The third benefit of our innovation agenda is that it is reinvigorating a culture innovation inside Booz Allen, and in today’s world that is a crucial differentiator when it comes to recruiting and retaining highly skilled creative and engaged talent. Our large contour of data scientists is a proof point. Five years ago, few people knew what that their scientist was, but Booz Allen did and now we have more than 500 of them, one of the biggest concentrations of data scientists in any single organization. This spring, our data scientist team cosponsored Kaggle the first ever National Data Science Bowl. The competition attracted more than a 1,000 teams and 15,000 submissions from across the world and in the end the winning algorithm was a major advance for both data science and marine research. Our data scientist are driving amazing advances like this everyday and at the same time they are helping to show case Booz Allen as a destination for bright minds, creative thinkers and strong leaders. The great thing about innovation is that it is not linear but the overall results with clients, with people and yes, financially reinforce our vision of reaching for growth through innovation. We believe that it will transform our company and work over clients and ultimately it will help us maintain our position as a disruptor and a leader in our industry. With that, Curt, it’s time to move to Q&A.

[Curt Riggle:]

Great. Thank you, Horacio and Kevin. Shanon, at this point, can you provide the instructions for the question-and-answer session of the call.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Carter Copeland with Barclays. You may begin.

[Carter Copeland:]

Hey, good morning gentlemen.

[Horacio D. Rozanski:]

Good morning, Carter.

[Kevin L. Cook:]

Hey Carter.

[Carter Copeland:]

Just, I wondered if I could ask a couple questions and dig in just the SURVIAC impact, I wonder if you could quantify how much of the work moved over to the new HD TAD and NDS TAD vehicles and whether or not that was immediate upon the ending of the previous structure.

[Horacio D. Rozanski:]

Carter, I’ll take a shot at that while we probably won’t give you specific numbers, I think it is important to understand the transition process, usually three parts to it, and the first is we had to replace the ceiling of the SURVIAC contract that means moving the work to new or existing contract vehicles and we have succeeded on that front. The second phase is we have to transfer the work onto those vehicles and a lot of that work is transferred already but portion is still on process. As we expected there are some timing gaps between when the SURVIAC ended and the new work begins, which is for the most part outside of our control and as I said in my prepared remarks those gaps are a key factor in estimating a revenue impact for FY 2016. Third piece is comprised of recompletes that are currently underway for new contracts or major task orders, these offer not only the opportunity to replace SURVIAC work but also to improve the broader scope of work that gives us the chance for expanded revenue growth in the future. We expect these recompletes to be awarded during the remainder of the fiscal year and the bottom line is that we are pleased with our progress so far even as there are some unknown about the timing of the follow on work. We’re confident that the estimated revenue loss will not exceed that was already factored into our guidance for the year and I will also highlight something, I said during the prepared remarks and that has given its revenue impact for the year is predominantly driven by the gap between when work ins and the timing of renewal we would expect to see the majority of the revenue drop in the second quarter. We will give you an update on our October call, but I do want to highlight that our success to this point really demonstrates the agility of our business and the strength of our relationships that we have with our people build over time with our clients. I think this is when the concept of the central partner becomes reality and it is clear that our clients are relying on us to continue with mission critical work.

[Carter Copeland:]

Just as a couple of follow-ups to those comments the work that is moving to new vehicles that are in the new structure should we just assume that those kind of - linearly have a regular cadence to have, they get moved over, over the course of the year and then with respect to the comments in your prepared remarks around margins, how should we think about the impact of the staff that you are going to retain while you work through the gap?

[Horacio D. Rozanski:]

Well there is couple of parts of the question right, we with the demand signals we see coming from our clients, we mentioned the proposal activity, pipeline et cetera, et cetera it doesn’t make sense not to carry those folks. The majority of them are already targeted or have moved on to replacement work for SURVIAC and with the demand signals coming doesn’t make sense to let those folks go frankly and then try to rehire to support the backlog that we think is coming. So it will impact margins in the second quarter but we plan for that and we haven’t changed our annual guidance, we are very comfortable with the revenue impact we gave you, we mentioned earlier that it is primarily in the second quarter and we are very comfortable with the guidance for the year at this point.

[Carter Copeland:]

Okay thanks. I know there is a lot of moving parts, so we appreciate the color.

[Kevin L. Cook:]

You are absolutely right.

[Operator:]

Thank you. Our next question is from Bill Loomis with Stifel. You may begin.

[William R. Loomis:]

Hi thank you. Just jumping on SURVIAC again, just so it sounds like have you lost any contracts on the transition, it sounds you talked a lot about the GAAP but have you actually not been successful on any of the tasks so far?

[Kevin L. Cook:]

For the most part Bill we have been very successful in may have been one or two small task where the client decided to stop work but we have moved work to a variety of contracts not just the original three of HD and Homeland Security, MAC contracts as well as SNIM we have had in many different contracts. So we have been very successful moving that work and we are pleased with where we are and where we think we will be at the end of the process.

[Horacio D. Rozanski:]

Hey Bill if I can just give a little more color and maybe try and round out this discussion on SURVIAC because the challenge with is we want to make sure that you have all the information available to you, but we don’t want to give you more than we have, I mean the some of this is still in process but to emphasize we have already replaced all the ceiling, the work is moving really smoothly and on schedule and there’s a couple of we competes out there some work as moved on to transition contractors or bridge contracts and there some re-competes are there that will finalized work. We feel confident about were all of that stance and as Kevin said these are comparative procurements but on the other hand in many cases they’re larger than the original procurements of the sub site do that as well. So all in all we are confident that the guidance that we gave is the guidance that we should have given and at the same time I have to say if I can take a moment time I’m extraordinarily part of the execution by the team on this it’s there is a lot of moving parts, it is a very challenging thing to do and it’s been done truly, brilliantly.

[William R. Loomis:]

When you say re-compete rate, talking about just your re-competes or you talking about the other contractor or re-competes that you may be looking at.

[Horacio D. Rozanski:]

We are competing here for every piece of work that’s our there.

[William R. Loomis:]

Okay, so there is a bunch bigger pie that what you have before and you are bidding some a larger group of contracts under the IX right.

[Horacio D. Rozanski:]

We’re are bidding very higher on a lot of things because we see that the demand signals as being strong and being proposal activity as Kevin said I think - I want to sort of expand beyond the SURVIAC discussion, because I think there is the bigger message is we are leaning forward that into a market where we see more opportunity then we say we saw year ago or two years ago this quarter and so bid in proposal activity it stopped the value of the proposals that we’re bidding, it stopped the length of those contracts is going back to historical norms. And we’re being pretty aggressive in both going after work where we believe our quality and our capability - differentiator and we’re aggressively holding on to our bench and building bench in places where we think we can grow and we use to talk 5, 6 years ago of hiring a head of demand, we stop talking about that because frankly demand was to unpredictable, we are not back to those days completely but we are making sure that we have the people that we think we are going to need to capture the revenue as it comes.

[William R. Loomis:]

Okay, great, thank you.

[Operator:]

Thank you, our next question is from Jon Raviv with Citi. You may begin.

[Jonathan Raviv:]

Hi, good morning thanks for taking the question. Horacio, I wonder if you could talk about how much of the growth you are seeing right now is just remind to overall better market versus your unique positioning and newer capabilities and investments boosting ability to take some share.

[Horacio D. Rozanski:]

I think what we are - if I can describe what I believe or seeing is I think we are seeing in market where it’s not like there is a ton more funding and the overall budgetary issues that the country is still wrestling where than there is no expectation that the overall budget is going to rise significantly or anything like that but we are seeing as we mention in prior calls our clients having the ability now to look out beyond four or six weeks into longer time frames and begin to plan and execute their missions. And against that we are seeing opportunity to then apply what’s unique about Booz Allen and what’s great about Booz Allen to help them and one of trends that we have talked about in the past is was this big moves towards LPTA it’s not like that’s all LPTA contracts are have and with none of them no more will be competed, but we are seeing every turning critical areas to best value and we are, certainly we believe we are the best value firm out there and so overall, what I would describe, they are trying to summarizes as I think we are in the process of gaining share against a comparative improving market

[Jonathan Raviv:]

Great, thanks for that. And this is the follow up on M&A appetite. How do you think about you talked about requiring as a force multiple organic growths, how do you think about that bucket of M&A versus the idea of gaining scale and what does that start process and implied our potential bite sizes in this sort of market.

[Horacio D. Rozanski:]

I guess all maybe I will start Kevin I think you probably want to add to that, Kevin talked about cash deployment priorities and I am sure he will want to talk to you more about that, but as far as I’m concerned the market as I see rewards quality, rewards agility, and rewards focus. I think are the best quality firm of there, I think we’ve demonstrated the ability to be agile and move to the places where the demand is going to be and I think we demonstrated that we’re focused, we are not trying to be all things to all people and play from the high end quality all the way to the commodity spectrum because I think anybody who tries that is going to get hurt. I long felt, that we have both adequate, more than adequate scale and more than adequate client access so we’re not out seeking for that, we’re seeking for those force multipliers that will create mortality for us to grow organically and that’s really we’re after and we’re extraordinarily selective we look at lot of things and we now do very, very feel them, they tend to be smaller, they tend to be very focused. That’s what’s made sense to us in the past, that’s it’s going back to quality, agility and focus is what the market is going to reward and I think that’s where we play from a position of strength.

[Kevin L. Cook:]

Horacio, if I can just add to that and make the key point there is, we’re at scale our infrastructure is size to be scalable beyond this point but we don’t need to achieve greater revenue just for the sake of greater revenue. We’ve said this as we started talking that M&A a couple of years ago, we’re focused on buying capabilities that could be force multiplier, [indiscernible] from a couple minutes ago. And that does tend to have us focus more on small to mid size deals, which are the types of deals that we’ve done over the last two or three years. And so I think, we will continue down that path, we grow a lot of capability internally through our strategic innovation group as well as our market teams. So between adding those capabilities from the outside from those small and medium size acquisitions with our organic capability development. I think it’s going to continue to reward us on a long term.

[Jonathan Raviv:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from Steven Cahall with Royal Bank of Canada. You may begin.

[Steven L. Cahall:]

Yes. Thank you. Good morning.

[Horacio D. Rozanski:]

Good morning.

[Steven L. Cahall:]

Maybe the first question is on those demand signals that you talked about, I was wondering if you could us a little more color as any of the particular pockets of the market defense intelligence, commercial international et cetera where there is - those are strongest or kind of the most different from where they’ve been in the last few quarters if they have.

[Kevin L. Cook:]

Hey, Steve, it’s Kevin. It’s broad based, we have significant - been proposal activity underway, clearly we had it in Q1 as we tried to move some of the SURVIAC work but it’s much more than that in the defensive intelligence space and we see very high been proposal activity in our civil space especially in the health account including BA as well as other sub-agencies. So and obviously as you know we’re continuing to pursue a lot of opportunities in the commercial and international space. So I’d be hardpressed the point to an area where we’re not seeing the demand versus the opposite. And that certainly unlike the way it’s been in the last couple of years.

[Steven L. Cahall:]

So maybe billing is just down a little bit the year on the SURVIAC transition, does that give you confidence that you will probably hit one-to-one book-to-bill for the year?

[Kevin L. Cook:]

Well, clearly that’s always our goal. I do feel good about backlog potential in Q2, specifically and we haven’t had a one point notepad to build for several years now. So I do feel good about that goal but I think it will be primarily driven by what we see here at the end of the September quarter.

[Steven L. Cahall:]

Okay. And then maybe just a question on cyber, couple of your peers rating in [indiscernible] have gone kind of different directions with their cyber franschises, one buying a company, one sort of spinning with it, what it hasn’t putting over the commercial. So when you think about the commercial cyber opportunity for Booz Allen Hamilton, what sort of go to market strategy do you think about and how do you think this might develop over the next couple of years.

[Kevin L. Cook:]

It’s a great question; I think that’s still very fluid, not so much thinking as it is in the market. But demand is clearly growing significantly and we are increasingly better positioned because we have been out there now for several years in our commercial and international efforts building the channel, building the client relationships, building the reputation helping them. So some of the issues that have been in the paper and so we see upside from that and so the precise way in which that market will evolve is I think it is hard to predict to tell you the truth and we are keeping our options open, but we are driving very, very hard not just against the protection of computer networks which is being lot of cyber has focused in the past but also against the protection of physical assets, you saw in recent articles of our cars being hacked. There was an article that talked about the IoT not as the Internet of Things but the Internet of Targets, there is market opportunity there and we are working with clients and this is where innovation. Again our innovation agenda plays a significant role because we have the ability to - across all about but these are relatively small nascent efforts still within Booz Allen in the commercial side on the federal side of course are larger, more mature and like I said we are keeping our options open for how to execute them most effectively.

[Steven L. Cahall:]

Okay. That is helpful. Thank you.

[Horacio D. Rozanski:]

Sure.

[Operator:]

Thank you. Our next question comes from Edward Caso with Wells Fargo. You may begin.

[Edward Caso:]

Hi good morning. I noticed that over the last two years or so to spend a steady increase in your exposure to fixed price contracts, could you sort of give us a sense what kind of contracts they are and whether you are increasing the risk profile of the firm, thanks.

[Kevin L. Cook:]

Hi Ed it is Kevin. You’re right. Fixed price percentage of our work is up a bit over the last couple of years, it is a lot of different types of work, I think early on, the current administration thought that fixed pricing everything made a lot of sense and so that has accounted for some of this increase even though we may not be doing anything different than we did on the cost reimbursable contract prior to that. We also have some software development contracts that tend to be fixed price, so it is not and just in one type of work where we see that, I would also say that fixed price is our most profitable contract type and to your point about risk, if you don’t manage them well it can be the most expensive contract type from a write down perspective that we managed that very well, we have a good process internally and we are really not in our opinion increasing the risk profile of the firm and just a final thought we don’t drive the contract type really, the client does. So if client decides the fixed price and we are willing to look at the risk of that procurement then we feel very comfortable with that type contract.

[Horacio D. Rozanski:]

I will just add to that by saying our mantra is sustainable quality growth and so we are not doing anything in the near term that puts the digital revenue create - looking for contract types and contracts and work that maximizes our ability to clients and to grow sustainably over the long run.

[Edward Caso:]

My other question is on the cash flow, Kevin if you could give some more color on the sort of the more modest level this quarter and whether you are comfortable in reaching or exceeding 120% net income in FY 2016, thanks.

[Kevin L. Cook:]

Well there is a couple of components to that answer, the first is if you look at our balance between last year this time and now, we have had a couple of events that we didn’t have in prior years, we purchases, share repurchase I should say two through [indiscernible] trades and then this most recent purchase on the open market in our first quarter. We also had a one time executive comp payout last fall, again one time on that and then we had some acquisitions last October as well. So when you look at that, it explains the balance year-over-year, it has been a little bit lower than would have otherwise been. From a 120% of adjusted net income conversion I think that is our long-term track record, it is very unusual for us to be below 1.0 for a year but we will look at it as the year goes on and maybe be able to give you little bit better guide as we get further end of the year, but right now that is still our long-term objective.

[Edward Caso:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Denny Galindo with Morgan Stanley. You may begin.

[Denny Galindo:]

Hi, just wanted to touch back on the M&A question. There is a number of assets that could be spin off this year recently just talked about the [indiscernible] IT group and you mentioned how you primarily focus on capabilities which was leaded to smaller acquisitions, but I was wondering how you would think about a bigger acquisition, how would you think about the synergies that there are might be and then if you don’t end up acquiring [indiscernible] more kind of standalone companies out there, how do you think this would effect the competitive pressure in the market place the pricing pressure, and the pressure to on contracts.

[Horacio D. Rozanski:]

Those are all great questions, let me try and take a swing out them. Let me start by saying, we are in this market, we have been in this market for a long time we will look at everything that happens and pay close attention to any valid opportunities I want to comment on anything specific that may or may not be going on, only that to say that we have a clear strategy it’s focus and we are going to do anything that the rails from that and we are not focus at this point on - you can never say never we are not focus on this point on any of those large things that may or may not come to market. I’ll said relates what would happen if, what we are seeing in the market is a number of things you know I think the A&D product manufacturers are focusing their portfolios there say a number of private equity firms, who have investments that are maturing all of those things are putting things in play. We don’t expect that will be significant goes relation as a result I think there is going to be a lot of new entrance and impact that’s what we are seeing in terms of financial sponsors and people like that. And at the end of the day, we compete with those firms today we compete very successfully and as I said earlier I believe the market in which we compete - compete towards quality, agility and focus we are not going to do anything that takes away from that and we’re operating from a position of strength and will continue to do so.

[Denny Galindo:]

And then secondly, on a different topic on a commercial international with other cyber news you know we have think you obviously see some traction there and if remembered correctly you also hire some new partners in the last couple of years so it’s just able to sale after non-competes are over. Can you give us an update on commercial and what’s happening there whether it’s in cyber or somewhere else?

[Horacio D. Rozanski:]

Sure, you’re right. Last summer, we have hired a number of partners and vice-presidents in Mideast and they had non-competes and non-solicitation agreement to carry through pretty much the end of the calendar year so they are selling heavily now and the business seems to be ramping as expected U.S. commercial same thing within out there little bit longer it’s little bit more mature you are right about commercial cyber our of found those [indiscernible] quite a bit and we are very comfortable with the progress we are making there and normally in the cyber area, but also in our health analytics area and some of work we are doing for some major energy companies as well, so it’s not cyber in the U.S. commercial and international markets which is the good news for I think.

[Denny Galindo:]

And a follow up on that is there any plans disclose more information about progress as some of those business funds?

[Horacio D. Rozanski:]

We’ve always said once it got to be a fairly significant part of our overall portfolio we might give a little bit more color while it is growing faster than the government side of the business right now it’s still not at the point where we want to talk of that much about it, but what we do is every year in the K, we talked about the percentage of the commercial and international business to the whole. And I think - keep me asked I think couple on a combine basis of last year of commercial and international market were something like 20%, 18% to 20% something like that. So again, we are very pleased with the growth and we would expect to continue to expand.

[Denny Galindo:]

Thanks for taking my questions.

[Operator:]

Thank you. Our next question comes from [indiscernible]. You may begin.

[Unidentified Analsyst:]

Yes, thank you very much and my question is going to be short on in the second fiscal quarter, you expect revenue and earnings to be down more so than third fiscal quarter, it sounds like that’s going to be your big and then you should see some rebound to both revenue and earnings in the third fiscal quarter.

[Horacio D. Rozanski:]

[Brian] (ph), I’m going to change my change my practice this one time. Number one, you are new and number two, I think it’s important because of the SURVIAC transition to talk about at just this once and that we do feel like we’re going to be very strong second half and that most of the SURVIAC impact will in the second quarter. Again, we don’t normally talk quarters but given the transition for SURVIAC it’s probably about as far as I’ll go but I’m glad you asked the question.

[Unidentified Analsyst:]

Great. Thank you very.

[Operator:]

Thank you. Our next question is from Michael French with Drexel Hamilton. You may begin.

[Michael French:]

Good morning, gentlemen. Thank you for taking my question. I’d like to return the discussion to the increase been in proposal activity, I believe Horacio said that you guys are being aggressive and there is where you have capabilities and they are well know and you are building out the bands I was wondering if you could elaborate in those two categories where specifically you are being more aggressive and why?

[Kevin L. Cook:]

I guess I’ll start since I made the original comment. I’m not sure there is much more to say other than, we see a year-ago, two years ago when you were at this point in the market, you will worry about things like government shutdowns, our clients didn’t know what funding they were going to have, it is the budget situation is still not perfectly clear at this point, right. I mean there is the recent scientific registration bill for next year for example but it certainly feels more stable than our clients feel like they have more control over their funding and their budgets and they’re signaling the man. They’re asking for more work and more proposals and we are up there working it very, very hard whereas two years ago maybe we were more worried about getting caught with too many people in the government shut down. Now we want to make sure we don’t get caught without enough resources. To me what could be significant demand and so that’s really the - is more of a nuance balance than anything else but it’s an important one and it’s why I keep back to this issue of focus, I keep coming back, we don’t want to get distracted by whatever else other competitors are doing in the market. We don‘t want to get distracted by other things, we want to make sure that we’re driving our strategy, that we’re driving our business, we’re executing well, I think the first quarter is a story of excellent execution on all fronts. I think the second quarter will continue to be that and all gear toward sort of this long-term view of sustainable quality growth and then making sure that we’re doing that and we’re doing that well.

[Michael French:]

Okay. Thank you. And there is a follow-up, maybe you can address any recent trends regarding your win rates and whether you are seeing marketshare gains or loses.

[Horacio D. Rozanski:]

We usually talk about our win rates annually in the K, but our recompete win rates or right at 90% range new work is somewhere in the 50% range, mid-50% maybe. And when you look at our topline growth versus others, we’re generally, either growing faster or shrinking slower or I’d have to say it in net-net, that we are taking share over the last couple of years.

[Michael French:]

Great. Thank you. End of Q&A

[Operator:]

Thank you. There are no further questions at this time; I would like to turn the call back over to Horacio Rozanskis for closing remarks.

[Horacio D. Rozanski:]

Thank you, Shanun. And thank you everybody for your questions and for the rich conversation as I said before this is the quarter where I think we demonstrated great execution against a long term plan both for the year and beyond. And it’s an exciting time to be part of Booz Allen with the market still more stable with new client problems to solve expanding capabilities right here in the firm. So we’re forging ahead, on both our annual and long-term plans, always with eney towards creating sustainable quality growth, our people feel tremendously energized by the opportunities that lie ahead and we are pleased to share our progress with you each quarter. Thank you for joining us.

[Operator:]

Ladies and gentlemen thank you for your participation. This concludes today's conference. Thank you and have a wonderful day.