Operator : Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's Earnings Call covering First Quarter Fiscal Year 2027 Results. I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg. Please go ahead.
Dustin Darensbourg : Good morning, and thank you for joining us for Booz Allen's First Quarter Fiscal Year 2027 Earnings Call. 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 2. With me today to talk about our business and financial results are Horacio Rozanski, our Chairman and Chief Executive Officer; Kristine Martin Anderson, President and Chief Operating Officer; and Troy Lahr, Executive Vice President and Chief Financial Officer. As shown in the disclaimer on Slide 3, some of the items we will discuss this morning are forward-looking and may relate to future events and as such, involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our first quarter fiscal year 2027 earnings release and slides. It is now my pleasure to turn the call over to our Chairman and CEO, Horacio Rozanski, who is now on Slide 4.
Horacio Rozanski : Thank you, Dustin, and good morning, everyone. Thank you for joining the call. Today, Kristine, Troy and I will share Booz Allen's results for the first quarter of fiscal year 2027. On our May earnings call, we described what we expected for the year ahead. We said we needed to focus on strong execution in a challenging macro environment. We said our civil and national security portfolios will continue to have different trajectories, with our growth coming from national security. And we said we will continue accelerating our transformation and investing organically and inorganically in the areas that will drive our future growth. One quarter in, our results are consistent with that view. Our revenues reflect the dynamics we expected. Through exceptional execution, we delivered solid profitability, and we continue to invest and transform. On today's call, I will discuss our results and how we are transforming in the context of the current environment. Then Kristine will cover our business trajectory, and Troy will walk through our financial results and outlook. Let me begin by framing the environment. Overall, it remains dynamic and uneven. We are encouraged that funding continues to improve. In Q1, funding was up 17% year-over-year. This is driving our momentum as we help our customers advance their critical mission priorities. And at the same time, we are in a midterm election year. Historical precedent suggests this will complicate the budget process and create some funding uncertainty, particularly towards the end of the government fiscal year and into our second half. In parallel, the government is fast-tracking implementation of procurement reform to make fixed price contracts the default approach. This is necessary and positive for the long term, and it could also lead to near-term delays in awards as customers adjust how they buy and structure work. Taken together, these environmental dynamics require us to continue executing with discipline and agility and to stay focused on what we know and what we can control. Against that near-term backdrop, the broader direction of the market is clear. Technological change is happening at a blistering pace, reshaping mission needs and making the threat landscape more complex and adaptive. To stay ahead and maintain advantage, our customers need to bring advanced tech into their missions faster, and they need the tech to work. Simply put, our strategic agenda is aligned to meet this moment. We are investing and moving with urgency in the areas we believe will drive our next phase of growth. Our priorities include accelerating our cyber and defense tech growth vectors, advancing our next wave of tech investments, including autonomy and physical AI, quantum, 6G and AI RAN, and maximizing the value of our unique partnerships and venture investments. We continue to make strong progress across these priorities. Let me give you a few examples, beginning with cyber. Agentic AI has fundamentally changed the cyber threat environment in 2026. We are in a new era where offensive cyber tools are becoming autonomous, making attacks faster, more persistent and more dangerous. Our nation needs defenses that can keep up with the pace of this threat. As a leader in cyber, Booz Allen is well-positioned to capture this growing demand across government and commercial markets. We continue to move quickly to expand Vellox, our suite of Agentic cyber products. Vellox combines our deep understanding of real-world tradecraft and our AI expertise. We are seeing a high level of customer engagement today, and we expect cyber to continue to drive near- and long-term growth. Shifting to defense tech. The mission set is different, but the urgency is just as clear. Within this growth vector, we are rapidly building, scaling and operationalizing advanced technologies for the warfighting mission. From soldier worn tech and battle management systems to resilient communications and autonomy, Booz Allen is building and integrating products and solutions to deliver battlefield advantage. This need for speed is central to our recently announced agreement to acquire Ultra I&C Mission Solutions. This acquisition will help us expand and scale our Defense Tech product line and accelerate our growth. Ultra Mission Solutions has a proven product portfolio that spans command and control software, ruggedized edge compute and encryption management. These products are highly complementary to our own defense tech products. By combining our portfolios and sales channels, we believe we will bring more differentiated and scaled products to market faster. Just as important, this is a team and a business we know well. We have partnered with Ultra for years and have seen firsthand the strategic fit of our cultures and technologies. We expect to close the transaction in the second quarter. Beyond cyber and defense tech, we're also investing and building in the areas where emerging technologies and mission requirements are beginning to converge. Quantum, an area where we have been investing for over a decade is a good example. One of our focus areas is post-quantum cryptography or PQC. Recent executive orders and OMB guidance are accelerating the time line for agencies to understand their exposure and prepare for migration. We have already been working with early adopters in government and industry to help with their transitions to PQC, and we are well prepared to scale as demand increases. And last but not least, our industry partnerships and VC investments are important accelerators on all our priorities. We continue to go to market with long-term partners like NVIDIA, AWS and Shield AI, and we are creating differentiated offerings with multiple companies in our venture portfolio. In closing, I hope you'll take 3 things away from my remarks this morning. One, we are on track with the expectations we laid out in May. Two, the environment remains dynamic, and we are executing exceptionally well against the things we can control. And three, we are accelerating our transformation in the areas that matter most to our future growth. And with that, Kristine, over to you to discuss the trajectory of the business.
Kristine Anderson : Thank you, Horacio, and good morning to all of you. Our results continue to reflect the dynamics of a bifurcated market. Our civil and national security portfolios face very different conditions and remain on different trajectories. In civil, we are in a transition. Near-term revenue is affected by a few factors we have previously discussed. We are still absorbing the prior year contract reductions and treasury impacts. Last year's slower award environment also led to fewer new starts to offset programs that are ramping down in the first half. And while our recompete win rate remains strong, the new contracts are generally smaller in scope and have shorter periods of performance. Together, this creates tough comps in the first half. Even with near-term pressures, we are seeing improving leading indicators that will impact civil later in the year. Demand is strengthening, and we are winning work. Looking ahead, we are ramping up our wins, continuing to expand the pipeline, pulling our defense tech and cyber solutions through civil agencies and building on our excellent track record advancing civil missions through technology. Shifting to our national security portfolio. This business grew in the first quarter and is expected to continue building momentum over the fiscal year. Demand remains strong and funded backlog was up 23%. Now we're converting that demand into growth by ramping up new work quickly and getting our technology into missions at speed. We are confident National Security is well positioned. Our technologies align directly with the nation's highest priorities, including homeland defense, war fighter readiness, cyber and U.S. technology leadership. As Horacio discussed, this is especially true in our defense tech and cyber growth vectors, where we continue to expect significant acceleration as we scale our product offerings. I'd now like to discuss the progress we're seeing in the shift to outcomes-based contracting. Building on the recent executive order, the government has released additional guidance that accelerates the move to fixed price contracts. We are pleased to see the implementation getting underway and believe it will create better alignment between cost, accountability and mission impact. It will also give us more flexibility in how we deliver, which creates the opportunity to bring greater value to our customers and support stronger financial performance over time. We have been advocating for this change and are leaning in to help our customers with these transitions. At the same time, we are already seeing some shifts toward more flexible, commercially oriented buying models. For example, our pipeline of other transaction authority or OTA opportunities is up 18% year-over-year this quarter. We have also been positioning Booz Allen technology solutions on government marketplaces, including Tradewinds, ARI and Platform One. These channels give customers faster, more flexible ways to buy proven technology and create new pathways to scale our products to mission. Before I hand off to Troy, I'd like to describe how we are injecting AI and Agentic capabilities across our business. I'll start with our internal operations. We are using AI to increase productivity and create efficiencies in how we pursue new business, hire and develop our talent and build products. Most importantly, we are continuing to embed AI in our tech to enable greater mission impact. For example, we built a multi-agent system to transform intelligence collection. The system can rapidly provide context, recommend and adjust collection plans and coordinate tasking across sensors. This reduces manual coordination and helps analysts manage increasingly complex sensor environments, enabling faster, more actionable intelligence. And across our Defense tech portfolio, we are operationalizing AI at the edge. Forward deployed war fighters need advanced tech that works in environments where connectivity, bandwidth and power are limited. Booz Allen's products are built for these conditions. We are integrating edge computing and AI capabilities to enable faster decision-making and more autonomous operations in contested environments. We expect AI-enabled delivery, combined with products and outcomes-based contracting to help us deliver more value to customers and drive bottom line growth. To wrap up, while the environment remains dynamic, our operational priorities are clear, and we are executing against the plan that we laid out in May. We are maximizing our cyber and defense tech growth vectors, scaling our product offerings, leaning into the transition to outcomes-based contracting and building momentum in Civil. With that, Troy, I'll turn it over to you.
Troy Lahr : Thanks, Kristine, and good morning, everyone. Our results today, particularly profitability and cash flow, highlight our strong operational execution across the portfolio, building on the momentum that we saw at the end of last fiscal year. We're operating with discipline, investing for the future and driving long-term growth. With that, I will now walk through our first quarter performance in more detail. In line with our expectations, first quarter revenue declined 4.2% year-over-year to $2.8 billion. Revenue ex billable expenses was down 3.8% versus the prior year. Our National Security business grew 1% year-over-year in the first quarter. We see healthy demand signals across the National Security portfolio, and we are beginning to accelerate hiring as funding continues to show signs of improvement. We still expect National Security to grow mid-single digits for the fiscal year with stronger growth expected in the back half of the year as we ramp up new work. Consistent with our expectations, our Civil business declined 16% year-over-year, driven by the roll-off of some larger contracts and fewer new program starts. We expect a sequential double-digit decline in civil revenue next quarter due to some contracts that are ending. Also, as previously discussed, some recompetes that we won are transitioning to follow-on contracts that are smaller in size and scope, creating near-term comp headwinds. We expect these first half dynamics to gradually ease into the second half of the year. Turning to profitability. We delivered results above our expectations in the first quarter. Adjusted EBITDA was $334 million at an adjusted EBITDA margin of 11.9%, up 130 basis points year-over-year. The strong performance was driven by continuously improving contract execution, favorable timing of investment spending and early shifts to outcome-based fixed price contracting. We saw solid performance across all markets. Adjusted diluted earnings per share increased 22% year-over-year to $1.81. This increase was driven by profit growth, a lower tax rate and a reduced share count. Adjusted EPS also benefited from a $19 million pretax unrealized gain on one of our venture investments. And on cash flows. Free cash flow in the first quarter was $261 million, driven by another strong collections quarter and favorable timing. From a working capital perspective, days sales outstanding, or DSO, was up 7 days year-over-year to 80 days due to revenue recognition treatment due to the nature of the Defy business. As a result, we expect our DSO to remain elevated relative to our historical level. Moving to demand and leading indicators. We had robust bookings during the quarter with a book-to-bill of 1.5x. Our trailing 12-month book-to-bill is 1.1x. Total backlog at the end of the first quarter was over $39 billion, up 3% year-over-year. Importantly, funding showed further signs of improvement in the first quarter with our funded backlog increasing 15% year-over-year to $4.7 billion. And finally, on capital deployment and the balance sheet, we deployed a total of $447 million in the first quarter, which consisted of $324 million for the Defy acquisition and also for multiple venture investments, and $123 million in shareholder returns via quarterly dividends and share repurchases. From a balance sheet perspective, we ended the quarter with $540 million of cash on hand and total liquidity of $2 billion. Our net leverage ratio at the end of the quarter was 2.7x adjusted EBITDA for the trailing 12 months. We're very excited about the Ultra Mission Solutions acquisition and expect this to close during our second quarter. We'll provide an update on the next earnings call. Our healthy balance sheet and strong cash flow generation provides us with the ability to drive shareholder value through flexible and opportunistic capital deployment. Now turning to our outlook on Slide 7. We are reaffirming our guidance for the year across all metrics as we are still early in the year and remain cautious on the funding and award environment. To provide some context around the shape of the year, we continue to expect our growth to be back half weighted, consistent with our remarks on the prior earnings call. We will see some pressure in 2Q on growth and profitability, largely due to the sequential headwinds in the Civil business. We expect continued growth in our national security portfolio throughout the year, but with a significant ramp-up in the second half. Finally, from a margin perspective, we continue to expect approximately 11% margins for the year. This implies a step down in margins for the rest of the year, particularly in 2Q due to the end of some higher-margin civil programs and backloaded investment spending. To sum up, we are proud of our performance this quarter and are encouraged by our leading indicators and the solid start to the year. While this remains a very dynamic environment, we are focused on driving transformation, supporting our customers' critical missions and creating value for shareholders. With that, operator, let's open the line for questions.
Operator : Our first question comes from Jonathan Siegmann with Stifel.
Jonathan Siegmann : I appreciate the opening comments on the balance of accelerated funding, but some of the uncertainty still in the second half, but the funded awards and backlog were real positive. Just how are you approaching -- a little more comments on how you're approaching guidance? Are there any anticipated new company-specific effects that may make the second half uncertain? And just to confirm, the acquisitions, you're not including, if I understand correctly.
Horacio Rozanski : Sure, John. I'll start, and Troy might want to jump in behind me. But to take it from the top, we're very happy with the first quarter, very solid performance driven by both great execution and really good selling quarter. And so the forward indicators, as you point out, are good. It is a dynamic environment. To give you a sense of what we're tracking, there's 4 things right now in Congress, all of which have an impact on our industry. The NDAA, a potential CR, potential reconciliation bill, a potential supplemental. And these and how they play out will probably shape whether the funding dynamic continues to be as good as it's been. We are cautious about it. And so this early in the year, we're not going to update guidance. By the time we get to the next quarter, we'll both have a better read on those things. And also, we will include into our guidance in October, what's happening with Ultra and some of those numbers. In terms of tailwinds to the business, we're very -- we feel very good about our cyber business. Agentic AI is changing the game and Booz Allen is right in the middle of it with a great set of offerings that have good traction. Defense tech is really good. And then some of the wins that we've had in the core business really are beginning to ramp up. So I take it all together, and I think cautious optimism is the right place to be.
Troy Lahr : Yes. And Jon, I would just add that just on guidance, it's still early in the year. As you said, book-to-bill was strong. The funded backlog was strong. And we'll look to roll in Ultra as we close that acquisition. So we're starting to see signs of improvement. It remains a choppy environment. But overall, we feel comfortable with the guidance right now.
Operator : Our next question is from Colin Canfield with Cantor.
Colin Canfield : Maybe if you could talk about funded bookings in the quarter and essentially kind of what you've seen -- excuse me, this upcoming quarter, kind of what you've seen already between National Security and Civil and how you expect the funded bookings to progress through the year between both of those segments?
Kristine Anderson : Thanks. Funding itself is up overall across the whole business pretty evenly, about 18% year-over-year in Civil and in National Security. I think you saw that a lot of our bookings this quarter were weighted toward National Security and our overall funded backlog is up quite a bit at 15%. So we are seeing -- most importantly, I think we're also seeing like good pipeline growth still in a steady award of environment right now and a steady funding environment. And as Horacio mentioned, it can be a bit choppy. So we're looking forward to see that as all of these macro issues work out kind of how it plays out later in the year. But so far strong.
Colin Canfield : Got it. Got it. And then maybe if you could talk a little bit about further portfolio shaping within Defense and Intelligence or excuse me, National Security. What are the key technologies and capabilities that the team views as most attractive that they can add? And then how does the team think about kind of what do they view as the key moat within Civil that they view as most attractive?
Horacio Rozanski : I think the -- we are transforming the business at very fast speed. This has been the focus. The financial implication of that is acceleration of profit growth -- profit -- dollar profit growth, not margins, but dollar profit growth and a healthy reinvestment so that we can continue to accelerate the business dynamic. Inside of that, on cyber, I would point you to the fact that we have a pretty complete stack that really helps with this moment. Our Zero Trust capabilities, business and opportunities are quite significant across both government and commercial markets. Behind that is the Vellox suite, which is an Agentic suite that gives us a real head start in what's really the next-generation cyber products. And then even behind that, we're already testing a set of things we're not ready to talk about yet with customers and hearing very good reports. So we feel very good about where we are on cyber. On defense tech, the Ultra acquisition should point you to the areas we're most interested in, C3BM and autonomy being the primary areas. We see a lot of complementarity there. And as Kristine pointed out in her remarks, we are uniquely positioned to help the war fighter at the edge. And that's not just on land, it's really across all domains. And we see both real need by the war fighter, real need, real demand and very good positioning by ourselves. And then more broadly, AI, we're using AI to transform our entire business. I know there's a market perception that AI is a headwind for us. And we -- I think we understand where that's coming from, but we believe we're in a different place because we've been investing in AI, building the right partnerships and positioning ourselves really for over a decade now. And I'll point you to really our Agentic AI and our physical AI positions, both of which are creating new demand, creating differentiation, giving us significant awards and the fact that we have this partnership ecosystem across both start-ups and hyperscalers put us in what I think is a great position to capture some of this new demand and make AI real in the mission in a way that is secure, in a way that is governable, and in a way that gives the warfighter the advantage they need.
Kristine Anderson : Yes. I would also just add that in addition to those mature technologies that we've been working for a while, our investments are now beginning to pay off. We are expanding our quantum business and driving acceleration there. And this quarter, we actually won our largest pure quantum win and now have won quantum work across commercial, National Security and Civil. That's kind of on the come. In addition to that, we've been productizing our AI RAN investments, especially at the edge. And this quarter, we also won an award specific to AI RAN to bring 6G to edge missions. So those investments are continuing. And then lastly, but not least, the Agentic software development that we have developed that we are continuing to refine that offering, and that pipeline has been expanding quite nicely also in Civil.
Operator : Our next question is from Gavin Parsons with UBS.
Gavin Parsons : I appreciate all the color on funded backlog. Anything abnormal onetime pull forward in there? Or is that a good representation of the funding momentum that you're talking about?
Troy Lahr : Yes. Thanks, Gavin. No. So there's really no funding pull forward. I think it's just the improving environment that Kristine and Horacio have talked about. So no, I would say, a clean quarter all around.
Gavin Parsons : Okay. Great. And then just on the National Security growth, any way to -- I know you guys have consolidated kind of defense and intel, but any way to parse, are there subcategories that are declining and others are growing and those lap? And once those headwinds lap, it's just a natural visible return to growth? Or any way to think about kind of the subcategories there that drive the acceleration?
Horacio Rozanski : I guess what I would offer to you is that we see the most growth potential, especially both at the top, but really especially the bottom line, as we've been saying on cyber and defense tech, which really cut across all of our businesses, as Kristine pointed out, we have meaningful cyber work in civil and some of our defense tech products span the entire portfolio, but they really are mostly going at National Security. And those are, I think, the brightest spots. Beyond that, our space business is doing well, and we see good upside there. But really, everything that we're doing around bringing edge capability to the war fighter, especially in what is right now a very active operational environment is important. So I don't know -- and by the way, let me just point out that the reason we decided to put intel and defense together is because that's really how we're running the business now. If you think about space, defense tech, cyber, those capabilities, those products and those solutions really cut across the entire National Security spectrum. And so to try and create a distinction without a difference, we did not think was helpful. I think this is a better way to describe the business to all of you.
Kristine Anderson : One part that I would call out for you is that we actually need to accelerate hiring a bit. We're a little bit behind right now, some supply constraints, particularly around hiring those with clearances. And so we're addressing that now. And so that's another dynamic that you would see. That cuts across, but it's particularly related to clearances.
Operator : Our next question is from Louie DiPalma with William Blair.
Louie Dipalma : Related to AI, can you discuss your eMAPS 3 renewal for, I think it was $2.7 billion.
Horacio Rozanski : Here's what I can say. We are very proud of the support of those critical missions. We are very proud that this was, as you know, a continuation of something where we started early bringing AI and those types of capabilities into the missions that we support. And this being the largest award in the history of the company, I think it demonstrates that we continue to bring real value to our customers in places where they really need us the most.
Troy Lahr : Louie, I would just add. I think it's indicative of the National Security portfolio in general. When you look, funded backlog was up 23%. National Security funding is 18%. So we're feeling comfortable about the solutions that we're bringing, and I think that, that was highlighted this quarter and reflective in some of these awards.
Louie Dipalma : Makes sense. And I also have a more long-winded question that's more high level as there's been a shift in the perspective of whether cybersecurity vendors are AI winners or losers following the threat posed by generative AI that Horacio, you mentioned at the onset. But this past week, OpenAI reported about an unprecedented cyber incident with Hugging Face. And we've seen the stock prices for many of the cybersecurity vendors and many of which you're partnered with such as Palo Alto Networks and CrowdStrike, these stock prices have rebounded by over 100% from their lows over the past 3 months. So with that context, back in like October of 2024, which seems so long ago, Horacio, you and Lindsay Joyce, you hosted an Analyst Day at the Helix DC demo center, in which you showcased like Booz Allen cybersecurity solutions and highlighted how Booz Allen has one of the largest collections of cybersecurity talent of any company in North America. So I'm wondering like are you seeing the cybersecurity demand associated with Agentic AI? And are you able to take advantage of this asset? And also related to this, like what are you doing with OpenAI and Anthropic on the cybersecurity side? I think you tweeted or posted on X that you're involved in the Project Glasswing with Anthropic and you put out a press release with OpenAI. But can you provide more detail on your cybersecurity posture?
Horacio Rozanski : Thanks, Louis, for that question. I almost feel like the answer should be yes. And I should stop there, but let me try and give you some color. We have been -- first of all, we've come a long way since 2024. Our business in cyber really lives at the intersection of our exquisite trade craft that we have honed over a very long period of time, and a set of AI capabilities we haven't invested in for over a decade. And so we believe we have a jump start on this market. If you look at what's -- at the environment as it's happening, there's been a series of things that began with not really even with Mythos, but before that, with the Chinese release of something called Villager all the way now, and we are seeing this acceleration in both concern and concern is turning into demand, both in the private sector market, especially, but also in our government clients. And we believe we're well-positioned to both help and to capture significant demand from that. As I mentioned before, the way we're thinking about it is on the part that we can discuss here, it comes in 3 pieces in the stack. First of all, Zero Trust is going to become an essential part of this because it is going to be virtually impossible to totally keep these Agentic attacks out of the network. So what you want to do is to minimize the blast radius if and when that happens to any organization. And again, Booz Allen, as you know, through some of our contracts has been a leader in Zero Trust in government, and that capability is portable to the private sector and in high demand. Above that, everything needs to get identified on the defense side to catch up to the offense side. We released -- we began releasing the Vellox suite. We have a second product out in market now called Ranger, which is really the product that helps a company begin to understand, remediate and solve vulnerability issues across our network at AI speed instead of the traditional speed. And beyond that, there's additional products coming, some of which are specifically capable of taking on an AI attack. And so we believe Booz Allen, like I said, is very well-positioned against all of that. I think the way we're going to see that is going to be both significant demand and growth in our traditional businesses, but really a very -- an acceleration of the productized and solutionized part of our offering, which will then drive margins and bottom line growth faster than top line growth, which has been one of the themes, but I -- like I said, I feel very good about that. And then on your last point, we are partnering with all of the major players and bringing something pretty unique. We do have Mythos in our lab, and we're using it extensively. We have a lot of the -- we're working in all of the frontier models. And I think Booz Allen is a recognized leader in this, and it's time for us to fully capture the upside that comes from this market.
Operator : Our next question is from Scott Mikus with Melius Research. Scott your line is open.
Scott Mikus : Can you hear me?
Operator : Yes, we can hear you now.
Scott Mikus : Quick question. Just what were the acquired sales and backlog from the Defy acquisition in the quarter?
Horacio Rozanski : Just -- the way to think about Defy is that there was some portfolio shaping done between the end of last year and the beginning of this year and that it roughly offsets. We sold some parts of the portfolio that are roughly the same size as what we acquired in order to make sure that we had clean runways into work that was really important to us. And so the way we've been thinking about it is certainly at the top line, more of a net zero and then maybe, obviously, Defy has better ultimate margins than the business we divested. But for the purposes of both the quarter and everything else, I don't think that they changed the math a whole lot.
Troy Lahr : Yes. I would just add that the Defy acquisition, the impact was not really material. Everything you're seeing in the numbers was really reflective of the core business around National Security and Civil is how we think about it.
Scott Mikus : Okay. All right. That's helpful. And then the Senate's version of the NDAA includes language that potentially restrict defense contractors from returning capital to shareholders unless they get a waiver pending a qualified investment plan. The scope of the language seems very broad. Just based on what you're hearing on the Hill, would that apply to government services providers such as Booz Allen? Just how are your conversations going with people on the Hill about that?
Horacio Rozanski : We're having a lot of conversation. We -- the language will probably change and get refined, and we'll get clarity on the questions that you're asking. All I can say for us is we're looking forward to investing in the technologies that I've been describing that will both bring advantage to the war fighter and create real shareholder value for us. And that at the current time, the -- all the avenues for capital deployment remain open.
Troy Lahr : Yes, Scott, I would just add from a capital deployment standpoint, we maintain a very balanced strategy. You saw the strong cash generation this quarter. That does give us a lot of flexibility. So we're still returning cash to shareholders via dividends and the buybacks. And then longer term, we'll focus on acquisitions and M&A. But right now, we're looking to integrate the Ultra Mission Solutions business, but strong cash generation, and we're deploying it.
Operator : One moment for our next question is from Matt Akers with BNP Paribas.
Matthew Akers : I wanted to follow up on some of your comments on fixed price contracts. I think you said in the opening remarks that's becoming more of the default option for the government. So how far do you think that goes? I mean, I think fixed price has been maybe half as big as kind of your cost reimbursable contracts in the past. Could that get to be kind of more of an equal mix? And if so, what does that mean for margins? And how do you make sure that you kind of size the risk appropriately on those fixed price contracts?
Kristine Anderson : Yes. Thanks for that question. I mean the administration has made pretty clear that the default should be firm fixed price contracting or outcomes-based contracting. And with the directive that all new contracts unless they get approved have to be firm fixed price. So it's early. We are still -- we are seeing a shift, but we're also still seeing some cost-plus contracts that have come out. I think the deadline was just a week ago or so. And then there is some work that won't be able to be definitized. I think we had -- we have some -- in our plan, some shift. And I would say that right now, it's a little bit ahead of that, but it's a little early to tell exactly what proportion will shift over. And then for work that's already underway, there's another year before some of the additional tasking on existing work needs to convert. So, so far, it looks it looks like that conversion will happen, and we have included that in our planning.
Horacio Rozanski : Yes. I'll just add by saying that, first of all, we welcome this direction of travel. We've been advocating for it. We think outcome-based is certainly good for the government, but it also gives us the ability to run the business in a way that we can both maximize impact and value to the government, in some cases, provide better pricing. And over time, if we're operating efficiently, earn a bigger return on that. So this is -- we are preparing for it. We're planning for it, and we're working on it and the early indications are positive, but it is not going to be an overnight thing because as Kristine said, even with the new directive, contracts don't turn over overnight, and there's a lot of work to do.
Matthew Akers : That's helpful. And then on the Ultra acquisition, I may have missed this, but what's the revenue run rate you're expecting from that? And just any thoughts on how kind of capital allocation shifts after that? Are you focused on delevering after that deal? Or do you think there's sort of more flexibility?
Troy Lahr : Yes. Thanks, Matt. I would say what we said is that really, when it comes to revenue, we see strong double-digit growth. I think that, that's going to continue for the next several years. EBITDA margins are well above the 20%. Beyond that, we're not going to get into the specifics around revenue. We will update guidance next quarter. So you'll see that. But overall, comfortable with how that business is looking. It looks like a very high-quality asset. So we like what we're seeing there. I would say just reiterate from a capital deployment standpoint, we'll still be returning cash back to shareholders via the dividends and the buybacks. We do have sufficient liquidity and access to the bond markets. I would say, over time, we'll look to deleverage the balance sheet following the Ultra acquisition.
Operator : Our next question is from Seth Seifman with JPMorgan.
Seth Seifman : I wanted to ask first on the Civil side of the business. Given the type of sequential decline you're looking for in the second quarter, it looks like we'll need kind of a nice bounce back in the third quarter probably in order to be in that kind of high single digits for the year. Is that something that you have visibility to now? And how do your comments about the risks around the midterm and the CRR for the second half kind of play into that civil outlook?
Kristine Anderson : Yes. Thanks for the question. And while the Civil business has been challenged recently, we do remain committed to it. It's very, very important missions, and we have very deep expertise in those missions, and we bring a lot to the table. We expect Civil to be down in the high single digits this year. It will be an improvement from last year. There are some dynamics that I mentioned in my opening comments around the things already announced around reductions in contracts at treasury and others and then also the smaller recompetes, which really kick in next quarter. And also the number of awards that did not happen last year, right, it was quite anemic in the award environment. And then so the new ramp just comes in a little bit later. So yes, it does -- the tailwinds for the expanding customer base and improved funding and improved pipeline are important, but we're still kind of coming through a transition year.
Seth Seifman : Right. Okay. Okay. And then maybe just following up on the last question about the contract type mix. I mean the whole -- most of the time that, I guess, we have data and most of the time that kind of I've been looking at the company, the fixed price proportion has been kind of in the either high teens or sort of low 20s. When you think about this evolution, are we at a place where by the time we're exiting this year, that's going to be a meaningfully higher number that's outside of what we've seen in the past, whether that's high 20s or 30s or something like that?
Troy Lahr : Yes. Thanks, Seth. I'll just say that, as Kristine said, I think it's early on. I think we're optimistic about the trends that we're seeing. There's always variations quarter-to-quarter. So I don't want to get ahead and start speculating how it's going to evolve. But we like what we're seeing now, and we'll continue to monitor it. I think that that's a positive for this company. We know how to execute on those contracts. You saw that this quarter. So we're comfortable. We're feeling good where we are, but we'll keep you posted.
Operator : Our next question is from Tobey Sommer with Truist Securities.
Tobey Sommer : In the industry, the clients in the federal level have talked about procuring software and hardware directly from the vendors as opposed through integrators. And last night, Oracle got a big DoD contract. To what extent does this impact the company at all? And I understand it would not really have a profit impact, but I'm curious if there's an influence in the P&L.
Horacio Rozanski : We have not yet seen the shift in the way one could hypothesize it will affect the business. If the shift took place, the billable expenses would go down and so you would see a bigger gap in the revenue ex billables and the gross revenue number. As you said, we view that -- ultimately, we view that as a potential positive in terms of reducing some of the volatility quarter-to-quarter in the top line numbers and no real meaningful impact in terms of how we prosecute the business. In fact, every time one of the large hyperscalers gets a contract like that, we're in conversations with them because the reality is that especially in some of these key missions that are most important, the ones that are growing the most, call it, the last mile gets more and more complex to execute and having these malls and having these capabilities available to the war fighter at the edge, for example, becomes something that is going to be essential to unlocking the demand. And again, here's a place where Booz Allen is shining and we expect will continue to shine. And whether the contract is such that the, call it, a cloud buy gets done through us or directly is really not that significant to the value that we're bringing to the differentiation that we're bringing into our capacity to affect mission.
Kristine Anderson : And it's not all that common that the software buys would actually come directly through us, cloud for sure, and there are a bunch of other -- the majority of our billable expenses are subcontractors, et cetera. So again, we don't mind them buying direct, but we have not really seen any impact so far.
Tobey Sommer : Appreciate that. And then for the calendar 3Q or end of the federal fiscal year, is there an opportunity for a better-than-normal book-to-bill and what is seasonally already a strong quarter because of the way the Pentagon has to kind of obligate a bunch of OBBBA funds or risk of a minor clawback?
Horacio Rozanski : We're not going to get in front of ourselves. I think at this point, the team is executing really well on both capturing demand and executing against that demand, making sure that what we deliver is of very high quality and trying to make sure that we continue to focus on dollar profit growth, especially as the portfolio starts to shift and maybe over time, accelerates towards fixed price. And I think we're, like I said, cautiously optimistic around some of these dynamics, but we'll just have to see.
Operator : Our next question comes from the line of Sheila Kahyaoglu with Jefferies.
Sheila Kahyaoglu : Maybe just on the funded backlog of 15%. How do we think about just the Q2 to Q4 implied growth rate of 1% to 7%? Are there any specific new wins in that backlog that translate into revenues in the next 3 quarters? If you could just -- if there are programs that you'd like to call out?
Troy Lahr : Yes, Sheila, I would just say from a program standpoint, we're feeling good about where we are. There's no one program that we're specifically focusing on to hit those growth rates that we talked about. I think you're seeing increased confidence with the funding, with the backlog. Again, both businesses are improving. So again, we're starting to see those signs. It's still a choppy environment, but no one program that we're focused on here. I think that, that highlights the strength of this business and the diversification, which gives us confidence in the outlook.
Sheila Kahyaoglu : Okay. And then maybe just on the employees down 7% or headcount down 7% in the first quarter. I know some of it is clearances and you guys plan to ramp in the next 3 quarters. I guess how do we think about whether it's AI or fixed price contracts, changing that relationship between revenues and headcount for those?
Kristine Anderson : Yes. I think part of the decline is really related to the decline in civil, right? So overall that we've been seeing for the past couple of quarters. We are still hiring and the portfolio is shifting and what we're -- and who we're hiring. Like I said, we do have some work to do to accelerate the hiring, particularly for cleared personnel. The disconnect between the model, the changes to the model, I would say, are more driven by changes in delivery and changes in the portfolio than anything else.
Operator : And our last question comes from John Godyn with Citi.
John Godyn : I'll keep it to one question at the end here, but perhaps a bigger picture one. Horacio, can we just talk about capital allocation? You mentioned some things in the venture fund paying off. There's an interesting M&A deal that you guys are also focused on and of course, shareholder returns. I was hoping we could just kind of check through all of these and kind of discuss the complete capital allocation picture here. Of course, the valuation multiple is quite low. And I'm just curious how you think of capital allocation as a tool to maybe regain prior valuation levels?
Horacio Rozanski : Sure. Thank you for that. We believe that the way to accelerate shareholder value is ultimately to grow the business at the top line and to grow the business faster at the bottom line. And so we continue to really laser-focused on that. So if you think about it from a capital allocation standpoint, we look first to make investments that will make that promise a reality as quickly as possible. We are, as you know, have always been very thoughtful and measured around M&A. We continue to be thoughtful and measured around M&A. But if we see something that is going to be an accelerant, especially to cyber and defense tech, we will continue to make relatively smaller acquisitions in that space. Beyond that, as Troy has pointed out, we have a strong balance sheet, and we have significant cash generation. So I don't think from our perspective that this is an either/or where either we make tuck-in acquisitions or we return capital to shareholders. I think that we can have a very balanced approach that gives us the opportunity to really do both as it makes sense. But ultimately, the focus of this management team is the ongoing transformation of the business, the strong execution quarter in and quarter out and the ability to differentiate ourselves by driving unique value to every customer that we serve. I really believe that if we do that consistently, if we do that with clarity and if we communicate to you all of these things that I think the market will realize the true value of Booz Allen over time. And then beyond whatever tactical moves we make in any given quarter on capital allocation, that's the North Star. That's the real pathway here.
Operator : And this concludes our Q&A session. I will pass it back to Horacio Rozanski for closing comments.
Horacio Rozanski : Thank you, Carmen. Thank you, everyone, again for joining us today and for your very thoughtful questions. I hope that Kristine, Troy and I provided you with a clear sense of how we're advancing the strategy, how we're executing the business and how we are -- we remain focused on accelerating growth over the coming quarters and in the near and medium term. I want to take a moment as we close here to really thank our team. Everybody at Booz Allen is fully committed to the missions that we support to driving the company and to creating shareholder value. So to all of you, Booz Allen people that are listening today, thank you for who you are and for everything you do. The future is bright for Booz Allen because of all of you. And with that, thank you again for joining us, and have a great rest of the summer.
Operator : And this concludes our conference. Thank you for participating, and you may now disconnect.
