Booz Allen Hamilton Holding Corporation Class A Aktie

Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's Earnings Call covering First Quarter Fiscal Year 2027 Results. [Operator Instructions] I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg. Please go ahead.

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.

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.

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.

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 Instructions] Our first question comes from Jonathan Siegmann with Stifel.

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.

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.

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.

Our next question is from Colin Canfield with Cantor.

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?

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.

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?

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.

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.

Our next question is from Gavin Parsons with UBS.

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?

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.

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?

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.

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.

Our next question is from Louie DiPalma with William Blair.

Related to AI, can you discuss your eMAPS 3 renewal for, I think it was $2.7 billion.

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.

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.

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?

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.

Our next question is from Scott Mikus with Melius Research. Scott your line is open.

Can you hear me?

Yes, we can hear you now.

Quick question. Just what were the acquired sales and backlog from the Defy acquisition in the quarter?

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.

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.

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?

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.

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.

One moment for our next question is from Matt Akers with BNP Paribas.

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?

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.

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.

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?

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.

Our next question is from Seth Seifman with JPMorgan.

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?

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.

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?

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.

Our next question is from Tobey Sommer with Truist Securities.

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.

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.

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.

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?

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.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

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?

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.

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?

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.

And our last question comes from John Godyn with Citi.

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?

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.

And this concludes our Q&A session. I will pass it back to Horacio Rozanski for closing comments.

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.

And this concludes our conference. Thank you for participating, and you may now disconnect.

Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering Fourth Quarter Fiscal Year 2026 Results. [Operator Instructions].

I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg.

Thank you. Good morning, and thank you all for joining us for Booz Allen's Fourth Quarter Fiscal Year 2026 Earnings Call. We hope you've had an opportunity to read the press release we issued earlier this morning. We also have 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 on the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning are forward-looking and may relate to future events or future financial performance, and may involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from forecasted results discussed in our SECs filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise.

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 fourth quarter fiscal year 2026 earnings release in slides. Numbers presented may be rounded and as such, may vary slightly from those in our public disclosure.

It is now my pleasure to turn the call over to our Chairman and CEO, Horacio Rozanski. We are now on Slide 4.

Thank you, Dustin, and good morning, everyone. Thank you for joining the call. Before diving into our results, I would like to begin by acknowledging 2 leadership updates we announced last month. First, I am very pleased to have our new CFO, Troy Lahr, with us onto the call. Troy joined Booz Allen earlier this month. He brings more than 25 years of financial leadership experience across the defense industry. Most recently, Troy served the CFO of [indiscernible], a defense tech space company. And prior to that, he was CFO of Boeing's Defense Space & Security business. I am excited to have him on our team. Troy, welcome.

And second, our Chief Operating Officer, Kristine Martin Anderson, has assumed the additional position of President. Kristine has been a growth leader at Booz Allen for over 2 decades. Today, Kristine and I worked together to drive Booz Allen's strategic positioning, business direction and performance. Naming her President recognizes the extraordinary impact and success she is having across the company. I am grateful for Kristine's leadership and look forward to continuing our partnership as we lead Booz Allen into the future. Congrats, Kristine.

So today, Kristine, Troy and I will share Booz Allen's results for fiscal year 2026 and our outlook for the year ahead. I will start by framing our performance in the context of the environment and our strategy. Kristine will then discuss our business trajectory and operational priorities, and Troy will then cover our financial results and fiscal year 2027 guidance.

Let's start with our performance. Fiscal year 2026 was the most challenging year we faced as a public company. We navigated unprecedented headwinds in our Civil business, as well as significant market changes across the board. Our team responded with outstanding execution of all controllable levers. And we went pedal to the metal in our strategic transformation. Our numbers for the year reflect those efforts as well as exceptional cost discipline. Despite declining revenue, profitability exceeded our revised expectations. What's particularly notable is that we deliver this bottom line performance while continuing to invest for future growth.

On the strategic front, the moves are simply too many to detail. Here are some examples. We drove significant growth in out-based opportunities and contracts, includes a nearly 90% increase in other transaction authority or OTA proposal submissions and about a 50% increase in OTA awards compared to the prior year. We accelerated the creation of differentiated offerings and products across our cyber and defense tech sectors, including our [indiscernible] suite and our Edge Xtend product lines. And we built a pipeline of opportunities based on unique partnerships, including with NVIDIA, AWS, ASIC Z companies and our own Booz Allen Ventures. I am extremely proud of how our entire team performed throughout the year. Our people stayed focused on what they can control, build tech for the nation and delivered with utmost excellence. Put simply, we are a stronger company than we were a year ago.

Let me now turn to fiscal year 2027 in terms of the current environment, our outlook and our strategy. Today's macro environment is being shaped by multiple forces. Geopolitical competition is intensifying. The global security environment is becoming more contested. And as technology advances and converges at breakneck speed, technological superiority is becoming even more central to national and economic security. For the administration and across our customers, these dynamics translate into a clear set of priorities, including defending the homeland, increasing warfighter readiness and lethality, ensuring American leadership in AI and cyber and making government more efficient. Increasingly, achieving those priorities requires departments and agencies to buy differently, putting greater emphasis on speed, commercial solutions and accountability for outcomes.

We do expect these procurement changes to cause continued uncertainty in the near term. Why? Because change this big is difficult, even when it's necessary. But importantly, we view these changes as both overdue and as significant sources of opportunity for Booz Allen in the medium and long term. This is the market we have been preparing for. The decisive actions we took in fiscal year 2026 have made Booz Allen more agile and preserved our ability to invest in fast-growing, highly profitable aspects of our business. Thus, we enter fiscal year 2027 with both momentum and focus.

Our strategic agenda can be summarized as follows: first, investing organically and inorganically to accelerate our cyber and defense tech growth vectors with particular focus on fully monetizing our sizable intellectual property portfolio; second, injecting AI and Agentic into all we do. from our existing work, to our newest opportunities to our own infrastructure; third, accelerating the next wave of tech investments into the market, including physical AI, quantum, 6G and AI RAN. And fourth, maximizing the value of our unique network of tech partnerships and VC investments. When I put it all together, I am incredibly optimistic about the opportunities ahead. We're moving faster. We're investing with focus and we're building the technologies to make America safer and stronger.

And with that, Kristine, over to you to the trajectory of our business.

Thank you, Horacio. I'll begin by describing what we are seeing across our business and how that informs our outlook for the year ahead. We expect our civil and national security markets to remain bifurcated with different near-term dynamics, and different paths to growth. In our civil portfolio, while demand remains below historical levels, we are continuing to see acceleration. Civil's fourth quarter book-to-bill was 1.2x, led by our Health business. Demand is broad-based and leading to new opportunities. While the volume of awards is high, many recompetes have shorter periods of performance and smaller scope. These dynamics mean it will take time for the uptick in demand to translate into growth. We are also facing challenging comps, particularly in the first and second quarter due to the timing of last year's contract cuts and reductions in our work at Treasury.

As a result, we expect our civil portfolio to continue declining this year, particularly in the first half. Conversely, we expect our national security portfolio to drive our overall growth in the coming quarters. In the fourth quarter alone, we won $1.7 billion of work. We are well positioned against national security priorities, especially in cyber and defense tech. As these growth areas outperform, we also expect to see margin expansion across the portfolio. I'd like to take a few moments to specifically describe how we are leaning forward to accelerate growth in cyber. You may remember that we first talked about the intersection of cyber and AI at our investor event in 2023.

Today, Demand for AI-enabled cyber solutions is increasing and will be a major driver in fiscal year 2027 and beyond. Booz Allen is already a significant player across the entire cyber landscape. We support the most important cyber missions in national security and help defend federal agencies from cyber attacks. We also serve an impressive set of Fortune 500 companies across all 16 critical infrastructure areas, and we respond to over 1,000 cyber incidents in the year. But we are not stopping there. as AI-driven cyber attacks grow in speed and scale, we are fusing our deep AI expertise into our cyber offerings and accelerating their path to market. Here are a few examples.

We emulated the advanced adversary by using Agentic AI to automate the cyber kill chain. This helped us better understand the threat and build next-generation defensive solutions to defeat it. We are using AI to strengthen our Zero Trust capabilities, which helped to contain the adversaries movement when compromise does occur. We are fast-tracking the development of our VLX suite of AgentixCyber products for both federal and commercial customers. And within commercial, our recently announced acquisition of DeFi Security strengthens our ability to scale cyber product sales and expand our reach across the market. We are bringing our decades of cyber expertise, our AI prowess, and our investment capacity to drive substantial growth and transformation in this new era of Agentic cyber.

Stepping back, cyber is just 1 area of opportunity ahead of us in National Security. Here are 2 additional examples across the broader portfolio. First, we are proud to have been awarded an OTA on Golden Dome for America's space-based Interceptor program. Our work focuses on a critical element of a prototype system for space-based missile defense. And in the fourth quarter, Booz Allen was awarded breakthrough engineering and Advanced Technology Solutions, or BEAT. [ Beats ] is a $937 million single-award engineering and technology contract. It supports the Army's modernization priorities. We will build tech to meet the Warfighters immediate future needs. This work adds to our portfolio of flagship engineering programs where we are injecting our advanced technologies into national security missions.

As we move into fiscal year '27, we will focus on the following operational priorities to drive our return to growth. First, maximize the significant opportunities we see in Cyber and [ dense tech ] this year. second, drive profit growth by building scale and go-to-market capacity for our product offerings; third, lean into and become a leader in new outcomes-based procurement methods and opportunities; and fourth, accelerate momentum in Civil by capturing the existing pipeline and continuing to inject [ Newtek ] into critical missions.

In closing, Booz Allen has momentum. We are focused on growth. and we are optimistic about the year ahead. I'll now turn the call over to Troy to take us through the numbers. Welcome to your first Booz Allen's earnings call, Troy.

Thanks, Kristine, and good morning, everyone. Before discussing the quarter in more detail, let's turn to Slide 5 to recap our fiscal year 2026 results. For the year, gross revenue was $11.2 billion, with a year-over-year decline driven by our Civil business. Despite the headwinds this year, we exceeded our profit expectations, delivering $1.2 billion of adjusted EBITDA and an adjusted margin of 11%. Adjusted diluted earnings per share for the year was $6.51. We generated robust free cash flow of $951 million and deployed $1.1 billion of capital through strategic investments dividends and share repurchases.

Finally, from a demand perspective, we ended the year with backlog of over $38 billion and a trailing 12-month book-to-bill of 1.1x. Despite the macro environment challenges this year, we remain focused on driving strong operational execution and accelerating investments across our key growth vectors, while also returning capital to shareholders.

Now let me walk you through our fourth quarter performance in more detail. In the quarter, revenue declined 6.4% year-over-year to $2.8 billion. revenue ex billable expenses was down approximately 7% versus the prior year period. Our national security portfolio grew 1.6% year-over-year in the fourth quarter, this was primarily driven by strong demand for our Intel work, partially offset by lower billable expenses for defense customers. As expected, our Civil business declined 23% year-over-year, driven by comp headwinds from the PTM contract roll-off and run rate reductions on other contracts.

Turning to profitability. We delivered above expectations in the fourth quarter, driven by continued strong contract execution and disciplined cost management. Adjusted EBITDA for the quarter was $309 million and an adjusted EBITDA margin of 11.1%, up 50 basis points year-over-year. Adjusted diluted earnings per share increased roughly 11% year-over-year to $1.78. This increase was driven by strong profitability a lower tax rate, a reduced share count and $12 million of pretax unrealized gains related to our ventures portfolio. Our tax rate in the quarter benefited from higher R&D tax credits. Regarding cash flows, collections were strong in the quarter, driven by efficiencies in billing and payment processing improvements. Free cash flow in the fourth quarter was strong at $212 million.

Moving to demand and leading indicators. Net bookings for the quarter totaled $2.5 billion. Our book-to-bill was 0.9x for the quarter with a trailing 12-month book-to-bill of 1.1x, including the [ MC TP ] award that is currently under protest, both the quarterly and trailing 12-month book to bills would have been nearly 1.2x. Backlog at the end of fiscal year totaled $38 billion, up about 3% year-over-year. We also saw funding improve in the fourth quarter with our funded backlog increasing sequentially to $4.3 billion. And finally, on capital deployment and the balance sheet, we deployed a total of $366 million in the fourth quarter, which consisted of $219 million in strategic investments made through Booz Allen Ventures and venture partnerships, and $147 million in shareholder returns via quarterly dividends and share repurchases.

From a balance sheet perspective, we ended the quarter with $728 million of cash on hand and total liquidity of $2.2 billion. Our net leverage ratio at the end of the quarter was 2.6x adjusted EBITDA for a trailing 12 months. Our strong balance sheet provides us both operational and strategic flexibility to drive growth through both organic and inorganic investments.

I will now walk you through our outlook on Slide 8. For fiscal year 2027, we expect to deliver revenue between $11.2 million and $11.7 billion, with the impact of recent divestitures and acquisitions roughly netting out. We expect performance to be bifurcated across our national security and civil markets, but we see improving trends across both markets. We expect the national security portfolio to grow mid-single digits. For Civil, we anticipate a decline of high single digits for the year as the Civil business continues to work through challenging comps, particularly in the first half of the year. From a quarterly cadence perspective, we see the first quarter as the low point for growth, with sequential improvement throughout the year. We expect to generate adjusted EBITDA in the range of $1.24 billion and $1.29 billion. This implies a full year adjusted EBITDA margin of about 11%. We expect adjusted EPS to be in the range of $6 to $6.35.

Our [ ADAPs ] guidance does not assume any impact from strategic venture investments. For comparison purposes, we had unrealized gains on these investments of $0.11 per share to [ ADIP ] in fiscal year 2026. And lastly, we expect to generate free cash flow between $825 million and $925 million, which includes the estimated impact of expenditures in fiscal year '27 and for the new [ Reston ] headquarters. This range does not include the previously disclosed $170 million IRS refund, which we now anticipate to receive in fiscal year 2028.

In closing, it's a privilege to be a part of a company that is building technology for the nation's most important missions. I look forward to working alongside Horacio and Kristine as we continue to drive growth through building differentiated products and Technology Solutions as well as generate significant value for our shareholders.

With that, operator, let's open the line for questions.

[Operator Instructions] Our first question comes from Gavin Parsons with UBS.

Troy, congrats on the new role.

Thanks, Gavin.

Two questions. Horacio, first, I appreciate the update on outcome-based solutions. If you could update us on your transition to drive revenue growth independent of headcount, that would be great. And second, how should we think about the relationship of funding awards to revenue given the funded backlog was down last year.

Sure. Let me try and frame the conversation as follows. First of all, obviously, last year was extremely challenging, but I'm really proud of the execution and the acceleration against our strategy, which sets us up for the conversion that you're talking about. And I feel like we're entering FY '27 with focus and with momentum in what's still a market that will experience volatility and some choppiness as some of the changes that are necessary and important like the procurement changes begin to take hold and we'll continue to see that. And so our expectations and our guide are tempered by all of that.

I would think about this the following way. Over time, not only in FY '27, but over time, we expect to see productivity gains from some of the work that we've done, for example, around [ delayering ], identifying our business, both on the infrastructure, but importantly, in the way we prosecute the market the move to outcome-based and fixed price and the monetization of our IP. And so that is what's going to diverge the curves between headcount growth and revenue growth. And as I've said, I would expect that over time, you will see higher profit growth and revenue growth and higher revenue growth and head count growth.

FY '27 has some unique dynamics because even the head count conversation typically was a conversation where headcount grew evenly during the year, every year, and so you could take points in time. The average headcount to average headcount fiscal year to fiscal year, that math is much more complicated given the year we had last year. But what we're seeing the pickup is in the areas that Kristine talked about, that I talked about in both cyber and defense stack, our businesses are moving faster towards fixed price towards outcome-based towards productizing many of our offerings. And in those cases, what you see is, again, customers -- when they pay for an outcome, give us a lot more flexibility in terms of how we bring technology and structured technology inside a program. And so that's we begin to see this divergence.

And as I mentioned in the prepared remarks, for example, on the OTA front, we've seen a 50% increase in wins year-over-year, but a 90% increase in the pipeline, which means that, that trend is accelerating and so we're optimistic about what we're seeing, and we believe we're well positioned to deliver more value to the government and to capture more profitability out of that.

And then on the funding side, Again, you have to take temporary dynamics. What we -- because it's what we have seen over the last few months is an improvement in the funding dynamic, the last quarter was much better than what we would have seen a year ago. This quarter is better than what we have seen a year ago. And so that gives us some level of confidence that things are accelerating the demand is -- and that the wins at are going to translate into actual revenue, perhaps not quite at historical rates, but certainly at much better rates than we saw last year.

Our next question comes from Louie DiPalma with William Blair.

Horacio, Kristine, Troy and Dustin, good morning and happy Friday. I was wondering has some anthropics met those limited release, has that impacted any of your major cybersecurity programs such as [ ThunderDome ] and CDM Defend and has it created like incremental positive opportunities? Or what have you been seeing with [indiscernible]?

Louie, I don't think we could trace a direct line from [indiscernible] to a program. But I will say this, and I think I've been out in public talking about this quite a bit. We believe strongly that 2026 is a year where cyber demand is going to accelerate across all of our markets. National security, civil and commercial because this is a year in which the offensive cyber tools, which are identifying faster than defensive cyber tools are going to create a gap and into that gap need to have companies like us with our tools, with the products that we're creating in the [indiscernible] Suite and the like. And we are beginning to see a huge pickup in those conversations. And that's why we are so optimistic and that's why we're investing in our cyber business right now.

We took the decision of taking what was going to be a release over the next 18 months or 4 different aspects of our [ Velox ] suite and to try and compress it all into the first half of this year because the demand is now. And so things that we're not going to be out in the market for another 1.5 years are in beta with some customers already. So -- and all every conversation that we have may begin with [indiscernible] but doesn't end with [indiscernible]. I would point you -- and I know I'm sure you've already seen it, but if you go to our website and you look at the lock Stryker, and you see what we've done in terms of mimicking what an agenetic attack tool is for automated red teaming and to be able to train the Agentic defense, it will give you a sense for how much cyber is changing and how much opportunity that creates for us.

Louie, I'd also add that this new Agentic AI era is really pushing forward the need for Zero Trust. Zero Trust is a critical for defense against any kind of attack. And so we're getting the impact there as well.

Great. And on this topic of zero trust, you recently announced or the Department of War recently announced that you were awarded an OTA for the space-based interceptor. Are you allowed to elaborate on the potential role that you may play with golden dome in space-based interceptor and is it cyber-related?

Unfortunately, we are not allowed to talk about our role, Louis, I will say this. We are very proud to be one of the few companies to have -- to be able to participate in this program to want to see in this program, and we are definitely bringing array game cyber, AI and everything we do.

Our next question comes from Gautam Khanna with TD Securities.

Yes, I just wanted to ask you to elaborate on the procurement environment, just the pace of contract adjudications broadly across the end markets? And then maybe if you could just address one of the concerns many have asked us about, which is reputational issues that came up last year with the IRS and what have you. Just if there's been any impact that's prevented you guys from pursuing bids in specific agencies or disadvantaged boot. Just if you could clear that up for us.

Sure. Thank you. We have definitely seen an improvement in the -- both the funding environment and the pace of awards. We do expect that funding can be choppy. But since January, I would say it has been remarkably better than it had been pre-shutdown. And also for awards, that's also true, starting to move at pace again -- we are also seeing the pace of new procurement picking up quite a bit. I think you might remember that especially in Civil, there were several months where there was almost nothing happening. It's quite busy now in terms of bidding, so the award environment is strong, demand picking up across the entire business.

Yes. On the reputational front, what I would say is we are in close contact with all of our customers. We're having very productive conversations. I think our -- we are letting our work speak for itself. And as we deliver things that are highly valuable that work, I think that's ultimately the best calling card for us. I believe we've made significant progress. And even at Treasury where we already disclosed the expected impact we are looking for opportunities to turn the page.

Gautam, I would also add, when you look at our guidance, you see the National Security business growing mid-single digits. So we're feeling good about the outlook. We're adding value to customers. So I don't see that there's a reputational issue there. see it that Kristine talked about in the backlog and on the book-to-bill, so we're comfortable with where we stand.

And just as a follow-up, would you mind letting us know about any key recompetes that come up? Are there any individually significant recompetes in the forecast period, what percentage of sales is up for rebid this year?

Thanks. The proportion of our business that recompetes every year is pretty steady, and this year is no different. The profile is really the same as prior years. They are spread throughout the fiscal year. We've already won some important ones in Q1, and we have more coming. Our recompete win rate is remaining very high, consistent with the past. So the only dynamic I would call out is that in Civil in particular, the recompetes are coming out smaller and shorter duration than the contract that they are replacing. And so that does put a little bit of pressure but overall, recompetes look pretty much the same as they have in the past. Nothing specific.

Our next question comes from John Godyn with Citi.

I wanted to follow up on the revenue guidance. First of all, just 0% to 4%, that range kind of a very normal range. But if you don't mind discussing what gets us kind of to the high end versus the low end? I just want to kind of imagine those scenarios alongside you.

Yes. Thanks, John. I can go ahead and take that. I would just generally say, we're seeing strong execution across the company. Profitability is also strong, while we're investing in some of these transformational efforts. We do see the guidance bounded by what we see today. I would say it doesn't include edge cases. We're not counting on a $1.5 trillion budget, but we are seeing an award environment really start to pick up we're seeing strength in the national security business.

Civil is also gaining momentum, but the first half is facing some tough comps, but we think that Civil will grow into the second half of the year. Really just seeing sequential improvements in the growth rate in the second half of the year for Civil. So overall, again, it's bounded by what we see in the marketplace today. But overall, we're confident in the business and the execution.

John, the only thing I would add to that is the recognition that this is still an environment that is fluid. This is an election year and so we've seen in election years that the -- with the second half of our fiscal, the next current fiscal year, the budget dynamics can take multiple paths from early CRs to early budgets, to things getting delayed, and we've seen all of it. And we have tried, as Troy said, to incorporate I would say, sort of the more likely cases into the way we built our guidance, but we can't incorporate every case of the tails.

Okay. That's helpful. You guys provided some very useful color on the shape of the year. I wanted to just kind of drill into that or hopefully, you could elaborate a little bit. it starts out negative and positive. It's a very dynamic year. Negative can mean a lot of different things. And I just wanted to kind of reask the question on shape of the year. And if the upcoming quarter is going to look similar to 4Q, that's very different than if its sort of slightly negative. So if there's any additional color you guys can provide on the shape of the year and just thinking through how we get to the full year revenue guidance, I think that would just be helpful in setting expectations.

I appreciate the follow-up and the request for kind of more detail on the quarter. I would say, when I look at it, it is first half is going to be more challenged in the Civil business. but gaining momentum throughout the year. Look, it's a choppy environment. And so I think we'll see variations quarter-to-quarter, but directionally, we see things improving in the second half of the year. I don't want to sit there inbound and provide guidance quarter by quarter. But I think when you take the full year guidance, you can see that the first half, especially at Civil, is going to be challenged, but gaining momentum and improving. But that's kind of how we see it first half versus second half. And then the strong demand for national security should be pretty favorable throughout the year, probably picking up more in the second half of the year.

Our next question comes from Mariana Perez Mora with Bank of America.

This is Alex Preston on for Mariana. I just wanted to sort of go back to the commentary on OTAs and the shift to fixed price. How are you guys thinking about that mix between fixed price and cost-plus going forward and maybe the impact to or assumptions underlying your margin outlook in '27?

So we are actively working with each and every one of our customers about the opportunity to move things to outcome-based and fixed price. It's not always the case that, that is what's right for the contract. And so this is more of a steady increase on fixed price and outcome-based as opposed to big step changes, what we have come to realize is that given the level of activity that procurement shops generally have to deal with overall that is -- they're more likely to entertain that conversation at a contract conversion point, at a time of awarding an option year and the like and so, but everything that we see suggests that we are going to see a steady move. Again, if you look at the last year to this year, part of the dynamic is that some of the contracts that were reduced in civil were fixed price contracts. And so that mix didn't experience the dynamic as we expected.

But if you could separate that in our national security portfolio, which is, as you know, where the vast majority of our cost plus work resides. That is a steady move towards fixed price and outcome-based and certainly the recent EO and upcoming guidance from OMB is going to push us into push -- push our customers in that direction. And then we've always said that margins are stronger on the fixed price work if we are allowed to deliver it in a way that it can add more value to the customer with more efficiency on our side.

And Alex, I can just give you a little more color on the margins as we see it for fiscal year '27. I think the cost control efforts are taking hold. We're also seeing strong execution on the business, and we're capturing healthy award fees. So overall, we're really performing well in all areas of our business, definitely win Civil and the National Security business. I think that that's illustrated in the 11% margins that we're showing. I think as we get into fiscal year '27 as a company, we'll see civil declines impacting the margins. And then we'll be investing in some strategic really R&D efforts that we're making in cyber and in defense tech, but we're also seeing the cost reductions and improving execution and the favorable mix helped margins. So you kind of -- there are some puts and takes to the margin as we look at it for fiscal year '27, but overall, we're comfortable with where we stand on the margins front.

Got it. And if I could squeeze another one in on the defense side and budget dynamics. I think it was answered in the previous question that the guide doesn't necessarily assume a $1.5 trillion budget. But it occurs to me that the base budget, even without reconciliation be really constructive for you guys. What are the sort of maybe watch items and reconciliation that could add to that? Or I guess, framed another way, what key programs and reconciliation might give a boost to that outlook?

As you know, most of our work does not sit at the line items in the budget. So it's really the overall -- what drives most of our demand signal and the funding and the ramp-up is more driven by how our customers -- the certainty our customers feel about having the money there later in the year to perform the work. And so obviously, anything that happens on reconciliation that moves the conversation in that direction is positive for us. We're doing a fair amount of work in our defense tech portfolio, for example, a fair amount of work on C2 at the edge that we expect is going to see significant demand. Our work on autonomy, our partnerships with drone companies or investment in some of the drone companies and technologies put us in what I believe is a really good position as the department ramps up those efforts.

And anything that has to do with, again, providing stability not just on the defense -- in the Department of War side, but also across the board in some key agencies like CBP and FEMA and the like would be to the positive.

Our next question comes from David Strauss with Wells Fargo.

Just to try and put a pin in this first half, second half dynamic, Civil did increase sequentially in the quarter. I know you have seasonality, but would you expect Civil to continue to increase from here sequentially? Or are we going to -- is there still a potential for a sequential kind of drop off?

Yes. I would say when I look at the first quarter. Generally, I think that there's pressure continuing into the first quarter should potentially improve maybe a little bit. But overall, I think, again, first half should be challenged. And again, I think that, that's bounded by the guidance that we put out of high single digits. I think you will see, given the comps that we see kind of first half will be different than the second half. It will look a lot different. But again, gaining momentum throughout the year is probably how I would tee it up at this point.

Yes. If I were to summarize kind of headwinds and tailwinds in Civil to give you a little more color -- the headwinds are last year's reductions in contracts, which extended through the first quarter last year. Our previously announced reductions in treasury, some smaller recompetes -- and because there was such an anemic award environment for many of the months last year, there means there's fewer new starts that overcome contracts ending. And then I would add in the DHS budget challenges because there's a significant part of pipeline, et cetera, that's in DHS.

The tailwinds, we've had some good wins, 1.2 book-to-bill in Civil for fourth quarter. We have an expanding customer base. We've gotten an increased pipeline. We've got more bids, and excellent recompete win rate. And so we are seeing a lot of resonance for the much-needed innovation that we're bringing to the mission, often in conjunction with some tech partners. So we're seeing some clear demand signals and our AI-assisted software development is pretty incredible. So we expect demand for that to go up as well. So it's really the crossover of where the -- where the declines were happening, nothing new, right, with the ramp-up of the net new. That's what causes the year to change.

Okay. That's helpful. And maybe Haas, could you size space as well as health today and kind of what's going on in those individual businesses, what were the what did they grow at in '26 and what you're kind of thinking for those 2 businesses specifically for '27?

So you said space and then...

[indiscernible].

Okay. It's actually very hard to put a specific number on any aspect of those businesses because, as you know, I mean, part of what we believe in is in technology convergence. And so even where some of our space business ends where Intel business be in, we're doing cyber in space, we're doing in space and trying to shed that too finely doesn't get us to where we need to be. I think we are optimistic about our base, the growth in our Space business large because of our position in AI and cyber in particular, because of the work we're doing on space domain awareness -- and because this is an area of our position on Golden Dome, this is an area of investment for the administration and one which we believe is much needed. So again, good dynamics -- actually, good dynamics last year and certainly good dynamics going into this year, some of which shows up in our numbers in Intel, for example.

On the health -- our health business, as you know, was challenged last year by some of the budget cuts by some of the contract cuts. I think this year, we're beginning to see increase in demand increase in the use of technology inside those contracts. But as Kristine said, the one headwind is we're winning the recompetes but the recompetes are shorter, and they are a little smaller.

Now inside of that, we're also -- because those are fixed-price contracts, a lot of them we have the opportunity to bring technology and to the extent that we remain a market leader in doing that, we believe we're going to be able to expand profitability in those contracts over time while delivering more value to the government.

Our next question comes from Noah Poponak with Goldman Sachs.

I was wondering if it would be possible to better understand what's really changing and why in the funding environment, I guess, over the last few years, there's maybe been some fits and starts and times where it looks better, but it was a head fake. And so the funded bookings in the quarter are up year-over-year, that looks better. Here everything you're saying. Can you just give us a little more detail on why things have changed? What is the customer telling you in why things would be more stable. Just to try to better understand if it is a new trend versus not?

Yes. It's a great question because you're right, it has been we say choppy, but at times in a hurricane and then look really good. I think it's important to remember that last year, there was so much of our last fiscal year that was where the government was focused on contract reviews and trying to readjust budget, moving it from agency to agency, or department. There were those requirements where if you added over a certain dollar amount of funding you needed to go to the top of the agency to get approval or sometimes the secretary to get approval -- and all of that really did slow down on funding.

I think as the new administration was aligning the spend to their priorities -- after the shutdown, then we saw that go back not to the levels that we saw in '25, but we saw it go back to a more normalized environment. although we are still seeing that there's incremental funding, right, they might fund you for a few months at a time and then come back in and add funding again. So I don't know that I would be the ones that call kind of what the future looks like in this, but it has been remarkably better since January.

No. I think if you look at our guidance, I think this is what we tried to incorporate. Certainly, a better funding dynamic than 25, but nowhere near the -- or our last fiscal year, fiscal '26, but nowhere near what we would have seen historically.

Okay. That's really helpful. I appreciate that. And then I also wanted to ask about how you're managing headcount relative to revenue, I guess, if the revenue of the business is declining, you can look to have costs decline more and stabilize margins or have margins even go up. Is it as simple as that with how you handled headcount versus revenue last year? Or is it more -- is more that the mix of the business is mixing to less headcount intensive? Is there any risk that you overdo it on the head count side for when bookings and revenue inevitably do bottom?

I'll say this, obviously, headcount is still important to the business even though we're in this process for the -- sort of the traditional algorithm is diverging from where we are going. I'll point you back to the things we said last fiscal year as we're going through the reductions. Obviously, the initial set of reductions were driven by specific contracts being cut very significantly. And we -- a lot of it was in Civil, as you know, and we worked through that layer around where more oriented or delayering as becoming more efficient towards managing the business in a way that it recognized what we expected to be a lower growth rate than we had experienced in years prior.

And I believe we have stabilized that part quite well. We've also given ourselves the opportunity to invest in the business. If you look at the sort of the -- we are calling for a similar margin structure this year to last year, even though there's -- we do expect more growth in our fixed price and outcome-based portfolio. And even though we'll get the full run rate of the savings this year. And that is to address some of the things you're talking about. We want to be in a position where in the areas where the business is growing, we can invest aggressively and some of that investment will come in the form of people.

And in the other areas of the business where we don't see the growth or perhaps we see some challenges, we will manage those the right way. And that's why it's so hard in a year like this one to predict precisely like Kristine was saying, where will each line cross in which month and how we will. But I think the overall trend line is towards trying to get civil, stabilize and return to growth over time and accelerating and maximizing the opportunities we see in national security, especially in defense tech, especially in cyber and even in space.

Our next question comes from Scott Mikus with Melius Research.

Horacio, Kristine and Troy. Your cash balance equal to about 8% of your market cap and your stock is trading at a multiple well below its historical norm. Your stock repurchases were a little light this quarter compared to prior quarters. Are you reluctant to buy back your own stock following President Trump's executive order aimed at limiting capital returns to shareholders? And how should we be thinking about the appetite for buybacks this year?

Thanks for the question, Scott. I would say we maintain a capital deployment strategy that supports growth and drives shareholder returns. Our first priority is obviously paying the dividend. We also have a very disciplined and strategic view of inorganic investments, especially around the areas that Kristine and Horacio talked about around cyber defense tech.

But you're also still seeing us we will keep doing share repurchase. You see that in the share guide, so I think we have a very healthy balance sheet that you talked about. We have a lot of financial flexibility. The cash engine of the company remains strong, given the solid execution that we have the strong growth in the National Security business, so that gives us a lot of flexibility and optionality. But we can do invest in the business and then also still looking to return cash shareholders.

Okay. And then you also did cost reductions during the year, and I think the cost takeout target was $150 million on an annualized basis. How much of that is net that you get to keep and isn't passed back to the customer how much of the net benefit did you realize in fiscal '26 versus what we should see in the EBITDA bridge for fiscal '27?

Yes. We generally get to keep about 40% of it given the nature of our contracts. Of the cost that we took out, we generally realized about 1/3 of it in fiscal year 2026. That does give us some of the financial flexibility as we continue to focus on execution and take a that does allow us to invest back into the business like Horacio was talking about. We definitely see good growth areas where we can leverage our heritage technologies and really further grow in cyber and defense tech. So yes, I think you're seeing those dynamics that we'll be able to hold on to some of it and then that will allow us to invest back into the business.

Yes, I think the investment is the key word going into this year. This is how we're thinking about it, whether it's organic from the P&L, whether it's inorganic from the balance sheet, we see certain areas that are poised for significant growth, and we want to make sure that we accelerate into those areas. I'll also point out that the 60% that Troy talked about as us not keeping makes us more competitive in cost-plus contracts allows us to expand our business in that direction as well. And so I think there's a lot of good news in what we did last year in terms of positioning us for reacceleration, partly in '27, we talked about the dynamics first second half but importantly, in '28 and beyond.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Horacio, Kristine, welcome. Maybe my first question is around headcount. It was down 12% in the quarter, but great productivity with revenue per employee up 6%. So what were the dynamics that drove this? And I guess somewhat related to this, how do we think about margins? They've held in really well despite the civil declines? And Troy, I think you made a comment that there's some mix impact in '27 with Civil. So it hasn't impacted margins yet. How do we think about that?

Yes. So I can start with the margin. Yes, so what you see is given where we are with civil declining that will potentially be a margin headwind. Offsetting some of that is the stronger work that we're seeing around the execution and the mix shift on margins that we talked about, the cost reductions, the better execution is helping and then we'll be investing in some of these R&D efforts. So again, I think there are some puts and takes there. Definitely, Civil is something that we're able to work through, given the execution and the mix in some of the other areas of the business.

Actually, the only other thing I would say related to head count is the combination of more work moving to fixed price and outcome based and our consistent constant drive to identify, to drive productivity and so forth should continue, hopefully, to see to translate into the dynamic that you're describing where our people will continue to grow, but it will be more productive, so revenue will grow faster than people.

Okay. Got it. And then if I could ask another one on Intel. Great growth in the quarter, up 9%. How do we think about that continuing into '27? And maybe, Kristine, if you could give your puts and takes like you did for Civil because that was super helpful.

Yes, there's a whole lot more tailwinds than headwinds in the national security business. I think with what we're seeing in geopolitical conflicts and the switch to some advanced tech in the way that we play in the advanced tech ecosystem, focus on autonomy, I mean I think we're in all the right places when it comes to defense tech and what we're doing in our intel business. So we're bullish on our national security business, and that's why you're seeing growth for the whole year. despite the continued headwinds in Civil.

Yes, I'll [indiscernible] on that question, just simply by just saying we've tailored our strategic priorities to the market that we see which is a market that is a fundamentally challenging market, continuing to have some level of volatility, continue to have some choppiness and as the changes continue to happen, changes that are positive overall. Clearly, we're going to see some starts and stops in some areas, but we're focused on organic and inorganic growth in the cyber and defense tech bringing AI and agent to everything we do and continuing to grow that portfolio, investing in the next wave of technologies. We're doing a lot of work on physical AI on quantum on 6G and [indiscernible], those will pay off beginning this year and beyond.

And the partner -- the unique set of partnerships, AWS, and BDA, the A16 companies our position in Booz Allen against the key trends in the market. And so that would be the other way to think about puts and takes. I think part of the challenge is that we are going to experience are macro -- market macro environmental challenges -- but inside of that, we're executing really, really well.

That's all the time we have for questions today. I'd like to turn the call back over to CEO, Horacio Rozanski for closing remarks.

Thank you all for your questions this morning. It was quite a robust discussion. And I hope we gave you a clear view about how we're accelerating our transformation and how we're positioning Booz Allen for sure, but well beyond that. I can't tell you how proud I am of the progress we are making. And my main source of optimism are the tool of Booz Allen they have shown time and time again that they can rise to any challenge and truly accomplish incredible things. So I want to close today with a big thank you to the Booz Allen team. Hopefully, many of them are listening this morning for your hard work, for your dedication. It's truly an honor to be your colleague. And I also want to thank our investors, especially our long-term investors who have been part of this journey with us, and we hope to -- you'll feel rewarded over time as we return to growth. And again, thank you all, and enjoy the long weekend.

Thank you for your participation. You may now disconnect. Good day.

Good morning, and thank you for standing by. Welcome to Booz Allen Hamilton's earnings call covering Third Quarter Fiscal Year 2026 results. [Operator Instructions] I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg.

Thank you. Good morning, and thank you for joining us for Booz Allen's Third Quarter Fiscal Year 2026 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, Chief Executive Officer and President; Matt Calderone, Executive Vice President and Chief Financial Officer; and Kristine Martin Anderson, Executive Vice President and Chief Operating Officer.

As shown on the disclaimer on Slide 3, please note that we may make forward-looking statements on today's call, which involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from the forecasted results discussed in our SEC filings and on this call.

All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements. During today's call, we will also discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our third quarter fiscal year 2026 earnings release and slides. Numbers presented may be rounded and as such, may vary slightly from those in our public disclosure.

It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on Slide 4.

Thank you, Dustin. Welcome, everyone, and thank you for joining the call. Today, Kristine, Matt and I will share Booz Allen's financial results for the third quarter of fiscal year 2026.

Before we dive in, I would like to begin by acknowledging the transition of our Chief Financial Officer, Matt Calderone. As we announced in December, Matt will be leaving on February 1 and today is his final Booz Allen earnings call. Matt has been with the company for over 23 years and has had meaningful impact in all his leadership roles.

Most recently as our CFO, he led us through a period of significant growth, deepened our connections with the investor community and helped many analysts and investors better understand what we do by actually showing them our tech. He also played a pivotal role in strengthening Booz Allen's leadership position in the tech ecosystem through our investments and unique partnerships.

Matt, I'm grateful to you for all your contributions. On behalf of all of us, we wish you the very best. To continue our search for a new CFO, Kristine Martin Anderson will serve as our Interim CFO, and in addition to her duties as our Chief Operating Officer. Kristine is an exceptional leader who has led and grown large businesses and currently drives the execution of Booz Allen's strategic and operational priorities. Thank you, Kristine, for leading us through this transition.

And now let's turn to our performance. During our October earnings call, we said we expected the macro environment to remain fluid and dynamic for the foreseeable future. We also outlined 3 priorities we would focus on to strengthen our near-term financial performance, expand our market leadership and reaccelerate our growth. Those priorities were to reduce our cost, accelerate our transition to outcome-based contracting and product sales and focus our investment by doubling down on improving growth vectors. Like cyber, national security, partnerships and AI.

Our third quarter results demonstrate we're making strong progress against those priorities. Our results are in line with the revised fiscal year guidance we shared in October, and we are narrowing the ranges at the top and bottom lines. Our performance reflects Booz Allen's strong execution and our ongoing transformation in a continually evolving and complex macro environment.

On today's call, Matt will walk you through the numbers in detail and Kristine will share our outlook for the remainder of the fiscal year. Ahead of that, I will focus my remarks on progress against our 3 priorities, both in terms of current performance, and on strengthening the foundation for the future.

Let's begin with the first priority, reduce costs. Early in the quarter, we took swift action to execute the cost reduction program we described on the October earnings call. These crucial and difficult actions were necessary to enable agility in a changing market. They also create capacity to invest in growth. In parallel with the cost reductions, we navigated the longest current shutdown in history. The shutdown exacerbated an already slow funding and awards environment.

Our performance demonstrates our resilience, disciplined cost management and strong execution. I am particularly proud that we supported our employees who were impacted during the historic shutdown. This decision was consistent with how we handled prior shutdowns. It ensures our people could immediately return to their customers' missions when contracts restarted. Overall, our results this quarter so that even in the midst of uncertainty and change, Booz Allen is managing the business tightly while preparing for the future.

Shifting now to our second priority, accelerating our transition to outcomes-based contracting and product sales. As part of the overall transformation of our business, we continue identifying opportunities to reshape our portfolio and deliver more technical outcome-based work. The recent divestiture of a portion of our DARPA business sets us up to unlock technical performer opportunities that align with our growth vectors. For example, our investments in full-spectrum cyber capabilities are strongly aligned with DARPA's mission.

As DARPA accelerates tech acquisition, through their expedited research implementation series or ARRIS Marketplace, we are positioned to be a direct supplier of advanced technology and solutions. We also continue to partner with our customers to convert existing work and procure new opportunities through more commercially oriented buying practices, including fixed price models. For our work on Thunderdome, this has zero try cybersecurity program. We have successfully transitioned the majority of existing task orders to include a fixed price component. We were also recently awarded nearly $100 million of fixed price work to expand Thunderdome across the Department of War.

Through these efforts, we will continue advancing Zero Trust capabilities, including accelerating AI and ML adoption for cyber defense use cases. As we shift more of our portfolio to fixed price and outcome-based models, we gain more flexibility to innovate how we deliver. This will create cost savings for the government and support Booz Allen's margin expansion over the medium to long term.

Staying on the topic of cyber Booz Allen's Velox reverser is a good example of how we are productizing our IP for commercial sales. Velox Reverser is our AI native malware reverse engineering product. This week, we're launching it in general availability to both federal and commercial customers. Velox Reverser accelerates an organization's response to today's most complex cyber threats. It performs fully automated malware analysis and delivers actionable intelligence in minutes versus what traditionally takes days. As AI-enhanced cyber attacks increase and become one one of the primary threats of 2026, this product is a forced multiplier for cyber defence efforts. Thus Booz Allen is really defining our future, innovating what we build, how we build and how we deliver to ensure the best value for our customers.

Lastly, we've made advances in our priority #3, focusing investments by doubling down on improving growth vectors to drive acceleration. Our progress is evident through the expansion of our national security portfolio, which is the combination of our defense and Intel businesses as well as our industry partnerships. First, we continue to see strong demand for our technologies within national security missions. 2 United States Navy examples illustrate this point. We recently announced the award of a $99 million contract with the Navy's Military Sealift Command, where we'll deliver wireless capabilities on board ships around the world, using low earth orbit satellites, advanced WiFi and 5G, our tech will enable ships to have secure, reliable connectivity at the tactical edge.

Additionally, many of our customers continue to increase our contract ceiling based on exceptional delivery and how well our exquisite tech works in their missions. We saw this with the Navy's program executive office for unmanned and small combatants. They recently expanded our work in the areas of unmanned and autonomous systems, mine and mine countermeasures and mission modules for literal combat ships.

This is in addition to work. We're already delivering for the Navy on our visual object localization and tracking solution. It uses machine learning and open architecture interfaces on autonomous platforms to passively detect and track objects in a maritime environment.

Our national security portfolio is well aligned to the Trump administration's highest tech and mission priorities and positioned for continued growth and expansion. The other growth vector where we have doubled down is our industry partnerships. We are leveraging the tech ecosystem by engaging and investing in new ways with a specific focus on the best companies in Silicon Valley. Earlier this month, we announced a new partnership between Booz Allen and Andres Horwitz, or A16Z one of the world's premier venture capital firms.

Booz Allen is the first-ever A16Z technology acceleration partner for governments. We've been working with A16Z portfolio companies for many years and have an exceptional track record in building and delivering transformational technology. That success is the foundation for this expanded partnership, and we look forward to building on our shared passion for driving the future of American technology. Together, we will co-create unique commercial tech for national security, public safety, health care and other government missions.

Booz Allen has committed to deploy up to $400 million in A16Z's late-stage venture fund over the life of the fund. This is good for Booz Allen is good for our shareholders and it's good for the country. Through this game-changing partnership, we will choose national challenges that need to be solved, build innovative tech solutions and deliver outcomes at speed and scale.

In closing, our performance this quarter and our progress against our 3 priorities gives me confidence that we are on track operationally and strategically. Looking ahead, we will continue to anticipate change in a dynamic environment. We will operate efficiently and with agility, accelerate our transformation, and we will focus on returning to growth.

And now I'll hand off to Matt to cover our third quarter financials. Matt, for the last time, over to you.

Thank you, Horacio, and good morning, everyone. As Horacio noted, this has remained a dynamic fiscal year. I share his pride in how Booz Allen has risen to the challenge as well as his optimism for the future.

Here are my 5 takeaways for the quarter. First, our third quarter results are in line with the revised fiscal year guidance we issued in October, even with the protracted shutdown. Revenue ex billables, where most of our profitability is generated, tracked in line with expectations. And both adjusted EBITDA and ADEPS were stronger than anticipated. Second, we successfully navigated through both the government shutdown and significant cost actions in the quarter. The shutdown pushed some procurements and funding actions to the right. We believe, based on our estimates, that these will have a cumulative impact of about $50 million on revenue and $20 million on profit for the full fiscal year.

Additionally, in our national security portfolio, which includes our Defense and Intelligence businesses. The shutdown caused approximately $60 million in billable expenses to move from our Q3 into Q4. In the quarter, we also completed meaningful actions to adjust our cost structure dropping our run rate spend by approximately $150 million. The full impact of these cost actions on profitability will be felt next fiscal year. Third, we continue to operate the business very well. We are running the business efficiently and seeing strong contract level execution. This is reflected in our strong margin performance in the quarter.

Fourth, while third quarter hiring and near-term funding were impacted by the shutdown, the overall demand outlook has improved. As of December 31, our qualified pipeline for the next fiscal year, that is fiscal year 2027, stands at nearly $53 billion. This is 12% higher than where our fiscal year 2026 pipeline was at the same point last year. And finally, we saw a meaningful decrease in our tax rate from a change in estimate related to the finalization of our fiscal year 2025 return. These changes included a higher R&D tax credit from more qualified technical work in our portfolio, as well as additional revenues qualifying for the foreign-derived intangible income deduction. We expect this to provide $0.47 of incremental benefit to ADEPS for the full fiscal year. Importantly, we also anticipate that a meaningful portion of this benefit will be recurring. I will now walk you through our third quarter performance in more detail.

For the quarter, gross revenue totaled $2.6 billion, representing a roughly 10% decline versus the prior year period and a 7% decline on a revenue ex-billable basis. The government shutdown had 2 impacts on revenue in the quarter one permanent and one temporal. We lost some revenue due to work not performed. And we also saw some revenue pushed from Q3 to Q4 given timing delays in billable expenses. Adjusting for these impacts, gross revenue in the quarter was down about 6% year-over-year. This is roughly in line with our expectations.

Within these consolidated results, our performance remains bifurcated across markets. Our national security portfolio declined about 1% year-over-year in the quarter, inclusive of the impact of billable expenses shifting out of our Adjusting for the impact of the government shutdown, our national security portfolio grew about 4% year-over-year. As anticipated, our Civil business declined about 28% year-over-year. We continue to expect this business to remain stable through the remainder of the fiscal year and are optimistic about its future.

Turning now to demand. Awards in the quarter were seasonally light as noted earlier, the shutdown caused delays in some funding actions and shifted some award activities to subsequent quarters. Net bookings for the third quarter totaled $888 million. This equated to a quarterly book-to-bill ratio of 0.3x and a trailing 12-month book-to-bill of 1.1x. The overall pace of funding was meaningfully slower than prior third quarters, down 32% year-over-year.

As a result, funded backlog fell 10% year-over-year. However, we did see a meaningful pickup in funding activity in December as customers work through backlog related to the government shutdown. Despite friction in the funding environment, we ended the calendar year with a record year-end backlog of over $38 billion, up about 2% over the prior year. As we look ahead, our qualified pipeline for next fiscal year, fiscal year 2027 stands at nearly $53 billion. This is 12% higher than where our fiscal year 2026 pipeline was at the same point last fiscal year. Our pipeline growth is broad-based. The national security pipeline is up 12%, while Civil is up 10% year-over-year.

Turning now to headcount. Booz Allen ended the calendar year with roughly 32,000 employees. Our customer-facing staff was down 2% sequentially in the quarter. Notably, this includes involuntary terms of about 2.5% and head count losses from the divestiture that were about 0.5%. Our focus remains on ensuring we have the right talent to execute our backlog and support pipeline growth. As funding flows and contracts continue to ramp we are scaling hiring accordingly.

Moving now to profitability. Strong contract execution and disciplined cost management helped drive profitability in the quarter. Adjusted EBITDA for the third quarter was $285 million. This translated to an adjusted EBITDA margin of 10.9%. Through the first 3 quarters of the fiscal year, our EBITDA margin was also 10.9%. We still expect margins to step down in the fourth quarter due to normal spending patterns and the anticipated catch-up in billable expenses.

Further down the income statement, Third quarter net income was $200 million, a 7% increase year-over-year. Adjusted net income was $215 million, an increase of about 9% from the prior year. Diluted earnings per share increased roughly 12% year-over-year to $1.63 per share. Adjusted diluted earnings per share increased about 14% year-over-year to $1.77 per share. These increases were driven by meaningfully lower effective tax rates and a lower share count that were partially offset by lower operating profit and slightly higher interest expense compared to the prior year period.

In the quarter, we also recognized a $7 million pretax gain from the divestiture of our [indiscernible], which is excluded from our non-GAAP adjusted income in ADEPS.

Transitioning now to the balance sheet. Our balance sheet remains strong, and we continue to generate meaningful cash flow. At the end of the third quarter, we had $882 million of cash on hand, net debt of $3.1 billion and a net leverage ratio of 2.5x adjusted EBITDA for the trailing 12 months.

As a result of particularly strong collections in December, free cash flow for the quarter was $248 million, inclusive of $261 million of cash from operations, less $13 million of CapEx. I will now turn to capital deployment. In the quarter, we deployed a total of $195 million. This included $125 million in share repurchases at an average price of $95.16.

Our total repurchase activity was just over 1% of outstanding shares in the quarter. It Included $67 million in quarterly dividends and $3 million in strategic investments made through Busan Ventures. We are also pleased to announce that today, our Board of Directors has approved a quarterly dividend of $0.59 per share, which will be payable on March 2 to stockholders of record as of February 13.

Finally, before Kristine walks you through the outlook for the remainder of our fiscal year, I want to take a brief moment to thank the people of Booz Allen. Booz Allen is an extraordinary place that does essential work for our nation, often in areas and in places that we cannot discuss. It has been a great joy and an absolute privilege to be part of this company. I'm truly excited for Booz Allen's future.

With that, Kristine, over to you.

Thanks, Matt. I want to add my thanks to Matt for his incredible contributions to Booz Allen's success. He will be missed, and we wish him great success in his new role. I will now walk you through our updated fiscal year 2026 outlook.

Please turn to Slide 7. We remain focused on execution in the remaining months of a dynamic year. We expect quarter 4 funding to improve over quarter 3 but remains slower than usual. We will continue running the business effectively and efficiently. As a result, we are tightening towards the lower end of our guided range for revenue and adjusting cash flow accordingly. We are also narrowing our EBITDA range, increasing adjusted EPS. We now expect to deliver revenue between $11.3 billion and $11.4 billion, given some of the impacts from the prolonged government shutdown. We expect an adjusted EBITDA dollar range of between $1.195 billion and $1.215 billion.

We are raising our ADEPS guidance to a range of $5.95 to $6.15 per share. Lastly, we expect to generate free cash flow between $825 million and $900 million. We entered the final quarter of this year confident in our trajectory and our right to win. Demand for our national security technology and expertise remains robust. At the same time, our Civil business is reset and demand is accelerating. It has been personally rewarding to work with our amazing people and commercial tech partners to develop and pitch big ideas that advance critical missions about which we are deeply passionate. For example, this quarter alone, we've advanced our cyber tradecraft and prepared to launch [indiscernible] reverser. We completed a major design review on the Air Force's Tactical Operation Center Light program, the Air Force's next-generation mobile command and control system. We launched America with beautiful passes on Recreation.gov. We engaged our allies on Zero Trust and Warfighter tech solutions. And we codeveloped innovative solutions with our tech partners from long-term partners like NVIDIA, AWS and Shield AI to newer venture portfolio companies. We are shaping our future.

With that, operator, let's open the line for questions.

[Operator Instructions] One moment for our first question please, its from Colin Canfield with Cantor.

And Matt, thank you for your leadership, characters the long-run determinant of [ Medidations ] alike. And honestly, it's something you've exhibited in spades from your 2022 starting point of Russia's invasion of Ukraine to this year's volatility. So certainly want to thank you. And then switching over to maybe the question side of it. As you think about the end market expectations for FY '27, is it fair to characterize defense and intelligence is growing was civil flat? And then essentially, when do you expect the downdrafts to lift on Civil in FY '27.

Colin, let me start -- let me frame the conversation First of all, I think the headline for this quarter is about strong execution across all aspects of our business and about positioning for the future by investing in our growth vectors, and transforming the business, especially with an eye towards growing the bottom line and reaccelerating our overall growth.

Our National Security business continues to see good growth and very good prospects. But I think what's really exciting to us is our civil business is beginning to reignite the pipeline is up double digits, both in national security and in civil and we're beginning to see some movement in the world activity on the civil side, which we have not seen all year.

So my cautiously optimistic take is that the market does feel like it's at an inflection point. We obviously need to get through a couple of -- still a couple of quarters of challenging comps, but the business is certainly starting to feel a different energy across the board. And where we see the uplift is really in the areas that we're describing as our growth vectors.

Our AI business continues to grow strongly. We see both good growth and acceleration in our cyber business, our Defense Tech business looks good, and this work that we're doing with commercial partnerships is also going to bring another wave of opportunity.

Got it. No, I appreciate the color. And then in terms of the year multiyear civil setup. Can you maybe kind of talk to as we think of like the pieces that have been down drafts this year that are likely to get made up over a multiyear period? Maybe just frame kind of that construct versus the concept of just like a high level of rebuilding the civil administration. And maybe like how you think about the multiyear level of work not just like the quantitative makeup from this year, but essentially, the level of cuts that have gone [indiscernible] this year, conceptually, how do you think about that as being an opportunity for Booz Allen Hamilton over a multiyear period?

Yes. Thanks, Collin. I would say that civil has changed, and that happens across administrations. We got a bit of a delay this time, certainly with all the cuts -- the biggest trend is that modernization and transformation has moved from a focus on cloud to a focus on readiness of data platforms that are critical for you see consolidation of platforms within and across agencies, and that's a focus and still a strength of ours.

And definitely, our delivery track record is what has them turn back to us. In terms of specific missions, while a smaller proportion of our forward-looking pipeline, health care will always be a national priority. And we are seeing like green shoots in AI-enabled public health, biothreat detection, fraud detection. At FAA, we're focused on an AI-powered aviation safety data platform, at Homeland Security, we're focused on autonomy at the edge, where integration of sensing and compute and decision-making is required. And then weather infrastructure, ground processing AI for multisource intelligence, integrating commercial sources. There's just a few examples.

One moment for our next question, that comes from Gautam Khanna with TD Cowen.

Was wondering if you could talk about the cost reduction plan. How much of that is yet to unfold? And how much -- if you could -- maybe you said how much was realized in the quarter?

Yes. Thanks, Gautam. I mean the actions are done. Obviously, they happened over the course of the quarter. And remember, given the nature of how we do accruals in the sort of cost recoverable environment, is not always a one-to-one impact of cost reductions to the P&L in a given quarter. They're essentially done.

We'll see a little bit of the impact in Q4, but this really is about setting us up for next year. And to go back to Colin's question, we obviously took a shock in our [indiscernible] business at the beginning of our fiscal year, these actions will essentially reset our margin structure to accommodate for the shift in our portfolio caused by those onetime actions in civil. So -- we saw very little bit in Q3, you see maybe a little bit more of it in Q4, the full weight next fiscal year.

Got you. And then could you talk a bit about or expand on your comments about how things have picked up with respect to pace of contract award activity? And maybe I don't know if you're comfortable, but what do you anticipate submitting over the next couple of quarters in terms of -- I don't know if you can quantify -- you gave the big pipeline opportunity set that -- what are you actually pursuing over the next couple of quarters?

I mean we are seeing more movement in December post the shutdown. So funding in December was more than twice what October and November were combined and January has started off strong as well, seeing some movement in the awards and just funding overall. We are pursuing the kind of work that we've talked about in AI, in cyber, in defense tech, doing a ton of co-creating with our partners -- we have focused in national security in areas like space ground systems and full spectrum operations, AI-enabled cyber operations, I've just talked a bit about Civil. So still very much tied to our growth vectors.

And the other thing I would say is, as you know, we have plenty of contract ceiling. And so we're looking for our signs and we're beginning to see signs, but it's early of demand picking up and as Christine pointed out, demand in civil speaking up and demand against our key defense growth areas in national security growth areas is -- remains strong.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Congratulations Matt and thank you for all the help. So maybe if we could just start off in terms of the civil, Kristine, you talked about the green shoots and the color is really helpful with the pipeline growing double digits, but it was down 28% in the quarter or lower sequentially. How much do you think was tied to the shutdown? And how do we even start thinking about a return to growth in that market?

Yes. I think the Civil business overall had -- this has been a year of reset, right? And the shift from cuts to focusing on the President's priorities, I think, is what you're seeing in terms of there was very little award activity that occurred in the majority of the beginning of our fiscal year, and we are just starting to see that turn now. So that pipeline has been there. We're starting to see some on-contract growth -- we're starting to see the awards unlock, and we are certainly seeing the pipeline expand.

Got it. And then maybe, Horacio, one for you. I'm sorry, I'm going to put a big picture question out there for you because I know you appreciate them more. As you think about the way you sell to the government, maybe what are 1 or 2 biggest changes you've done to transition the business a bit more, whether it's in health or defense or civil. If you could just talk about that.

Yes. I mean, there's a couple of things that are different now than they were perhaps a year ago. One of them is we have been working on all of these commercial partnerships. We've had our venture fund for a while, but that has really picked up and accelerated -- and we have become a lot more agile in the way we go to market with these companies. Hence, the A16Z partnership. There's a good example there on payments, for example. As you know, the U.S. government is one of the largest, if not the largest payer in the world, if you think about all the payments they have to process. And the idea of bringing commercial solutions to that, we reimagined how we would approach that, not just from the solution standpoint, but even from how we would have the conversation, how we would sell it, how we would run a pilot, who we would bring in and we were able to put together a couple of companies from the Valley that have great capabilities, one of which was focused on this topic, one, which has nothing to do with this topic that was in the A16Z portfolio. And that -- we see more of that in the future, and we see ourselves as advantage because we can truly create a complete solution across all of these technologies.

There's opportunities like that, that we see in health. There are things we're already pursuing and we have been pursuing against priorities for the Department of War from Conor U.S. to integrated C2 to battle management. And so to me, that is sort of 1 big trend. The other big trend is we continue to drive our own work towards outcome-based, -- we've been having this conversation with customers for a while. The level of receptivity of that since acquisition reform was announced has gone up significantly. I talked in the prepared remarks about the Thunderdome opportunities and how things -- they are moving to fix -- we believe that this is going to be a significant trend over the next couple of years that we view very positively.

Now part of the way that plays out is once we take more control over the delivery, we can actually lower the cost to the government, which is why this is good for the government. While at the same time, if we perform well, driving our profitability, which is why I've been saying over the next couple of years, I would expect Booz Allen's bottom line to grow faster than the top line as we again deliver more value and capture more value.

Our next question comes from Scott Mikus with Melius Research.

Matt, nice results. Good job on the cost take. Your head count was down 12% year-over-year. just as the business returns to growth and deleverage AI-based solutions. Should we expect organic revenue growth to outpace head count growth going forward? And is that enough to offset the pricing pressures you're seeing on some of the civil programs as they come up for recompetes?

Yes. Thanks, Scott. And the short answer is yes, right? I think we're running the business efficiently, and we're also getting more leverage out of technology as even the things Horacio described, you were leading with solutions that are more tech forward. So you did see our revenue and profit per employee go up. I think that's a trend that you'll see persist into the future.

Okay. And then 1 other modeling question Previously, you had mentioned you expected a $170 million cash tax refund in fiscal '27. Just the cash tax benefit from this year and the change in tax rate impact that refund you're expecting next year? Could it be a little bit higher?

No. But we do see -- like there are still 3 cash tax headwinds for next year. there's the continued unwind of $174 and states ongoing assessment of the 1 big beautiful bill. There's what you just mentioned, the $170 million refund from the IRS. And then you the benefit from the incremental R&D tax credit recognized this quarter, we don't expect to convert to cash this year. You're going to see some of that next year. And then given -- the recurring nature of at least some of that tax credit, it should be a longer-term cash tax headwind.

One moment please for our next question, it comes from the line of John Godyn with Citi.

I wanted to just kind of dialogue a little bit about the defense budget outlook. There's this idea of the possibility of a $1.5 trillion budget. And I don't expect you guys to take a view on that. But what I was hoping was you could just offer thoughts on how a company kind of prepares for even the possibility of something like that.

Do we look out there and say, let's make some investments ahead of that. We've seen other companies engage in M&A possibly ahead of a change in an inflection in the budget -- do we just look at it and say, let's wait and see what really happens. And maybe you take a view and you say, all right, it could be 1.2 or 1.3. There seem to be so many permutations I'm just curious when the customer is messaging the possibility of that kind of growth, how does that kind of feed into the strategic thinking and it's not a leading question. Obviously, we don't know. I just wanted to kind of dialogue a little bit about it.

Well, it's a great question. And the precedent has been clear all along about rebuilding the industrial base, the defense industrial base around recapitalizing some aspects of it around bringing new technology to bear for our war fighters in the battlefield. And I think a larger budget, whatever the number ends up being is consistent with the messaging that's been going on all along. And from our perspective, we have been preparing all along to support those priorities.

If you go back a year ago, we were talking already about leaning forward heavily into opportunities with Golden Dome even before that got fully articulated. We expect that to accelerate in the coming years as 1 example. We're doing a lot of work on space. our traditional strength in cyber, we expect next year to be a significant year for cyber across the board, in part because of what we're seeing with the budget. But frankly, in part because the Agentic cyberattacks and the first publicized one was when Atopic had the courage of coming in and explaining how Claw was used maliciously for an attack. All of that is going to, in our view, accelerate the need for more cyber at the intersection of cyber in the next year. And we have been making significant investments in all those areas, right? That's why the way we pick it up is there's a few growth vectors that we believe will ultimately drive significant growth for Booz Allen and significant value against these key priorities. Cyber, AI, national security, especially related to space and the border defense technology, right? I mean -- and all of these apart again, set us up to be able to bring solutions quickly into those spaces, which is why we're excited about it.

So that's the way we're thinking about it. This is a very dynamic environment. And there's a level of unpredictability around the environment and across all of our markets that we have now sort of put into our management motion and so we're looking to become more agile. Matt talked about the cost takeout, that is an element of that. So I believe we're well poised right now to respond a little bit ahead, but we don't need to get too far ahead of budgetary either headwinds or tailwinds in a stronger way than we have over the last 12 months.

Got it. That was very helpful. It sounds like needless to say, regardless of what happens, a budget like that is something that you think Booz will find ways to participate in, in a meaningful way.

Completely yes.

Our next question comes from the line of Seth Seifman with JPMorgan.

Congratulations, Matt. I wanted to ask, when we think about the funded backlog and recognizing that the award situation depressed in Q3. Where do you think you can end the year on funded backlog? And will that be enough to allow for growth in fiscal '27?

Yes. Thank you. As I mentioned, we are starting to see awards accelerate, and we hope that continues through the rest of the quarter, although it has been choppy, good months and bad months in terms of pushing funding out and we're less focused on Q4 at this point because we're keeping ourselves heavily focused on building momentum for next fiscal year. work that we win in February would still have time to ramp up, which would affect the next year. But we are seeing really positive signs.

As I mentioned, strong funding in December, so far in January, very strong, an improved demand environment, pipeline's up, but lots of proposals being worked at all moments here and also even unsolicited proposals, OTAs it's very active. And we are -- we've got ourselves rightsized and ready and positioned for growth.

Okay. Great. And then maybe as a follow-up, in your filings, you guys have pointed out potential for increased competition from new players and commercial competitors. Are there places you'd point out in the business where you see that threat being more acute or maybe where you already see more competition from new competitors?

The competitive market has already evolved. If you looked at the people that we would have listed as primary competitors 5 years ago and even primary teammates 5 years ago and the people that we team with now is a different competitive set. For us, we look at this as more as where can we create opportunities by taking advantage of the fact that we have a unique set of relationships with the tech world Certainly, the work we're doing with AWS. I'll give you an example. We're working with AWS on an Agentic AI platform that would transform intelligence analysis as 1 example.

The fact that AWS is interested in co-investing with us and co-creating with us there is hugely exciting. Does that mean that somebody. Another tech company will work with somebody else on a competitive platform, probably. And that's okay. We believe that teaming together, we can do more the work we've done with NVIDIA all with the way back to 2017 positions us uniquely and again, I could go through the list, right? But from shield AI to hidden level, small companies that you never heard of to the largest companies, we have built I believe, a unique ecosystem that can take advantage of the different trends that we see in the market.

Our next question comes from the line of Jonathan Sigman with Stifel.

Good luck, Matt. Just -- in the past, you've highlighted tactical selling and on-contract growth as 1 of the challenges of this dynamic environment. And Kristine, you had some encouraging comments about seeing a recovery in Civil. I just wanted to clarify whether this is normalized for the entire portfolio? Or is it still below trend and expecting that to still be a challenge next year?

Sure. On contract growth will always be important. And it's really just a matter of matching the customers' needs with solutions that we can bring forward to them. So there's always a constant selling that's going on. As we mentioned, the funding environment has been choppy right? So does 2 months make a trend, I hope so. we're going to see here over time. There is a trend towards just funding smaller amounts more frequently, and that's a lot more activity for a lessons workforce. But we do see encouraging signs in that area, both in the funding and also, as we mentioned in the pipeline, and that includes pipeline for on-contract growth as well as pipeline for new awards.

That's great. And then if I can slip in another 1 about larger new program, Golden Dome, the company's capabilities are really well suited for the mission. Can you just maybe level set what, if anything, we might hear about the company's role publicly, understanding a lot of it's happening in the dark world.

Yes. We're excited about our space business in general, from space domain awareness to ground systems and bringing AI to developing common ground systems and virtualizing that entire infrastructure. On Golden Dome in particular, we have been very active pursuing a number of opportunities, many of which we are not prepared to talk about yet. But we see this as an area where Booz Allen, as you said, has a lot to contribute, and we expect and hope to see significant growth there.

And again, I mean, I'll take it back to something Kristine said that the environment is still choppy and uncertain. And so part of what we need to do and we need to continue to do is find these areas where the mission priorities, the funding and our capabilities are well aligned and double down on those areas, which is why you're hearing us talk about these growth vectors, you're going to hear us talk about those growth vectors you're going to see us invest in these areas to drive both top line and in particular, profit growth.

And our last question will come from Tobey Sommer with Truist.

Good luck, Matt. I was wondering if you could comment on what you might see as the interplay the President indicated an appetite for a real tectonic change in defense spending next year. But I'm wondering if there would be interplay and offsetting areas should the growth in defense be very substantial as opposed to just blowing up the deficit in particular, is civil an area that you think would be a source of fiscal restraint?

That has been the trend certainly over the last year. And even inside the Department of Award, they've done a lot of work to make sure that they're focusing funding against the key priorities. The one big bit fulfill was pretty specific in terms of the areas of investment, it was not broad-based. And so we interpret things going into next year as again, the President and administration picking a key areas of focus and doubling down on funding and national investment against those areas with an expectation that, that industry will follow suit and participate in that, part of what we're trying to do is anticipate it from the standpoint of the positions that we're taking, the capabilities that we're funding, the growth vectors that we're investing in. But a big part of it is we built more agility into our system.

Again, I point you to the cost reduction. I point you to the fact that we have flattened and simplify the management layers in order to be able to respond more quickly to the fact that as funding potentially gets reprogrammed against these priorities, even if overall funding is higher, we need to be well positioned to respond to that. And I believe that we are -- we've made significant strides.

And I would also add that if you go back a couple of years, when I was a civil sector president, I used to talk about enduring missions. These are missions that have to be done in civil regardless of administration, but what changes is the approach. And so we're seeing that, right? You still need a strong FAA in aviation safety. You still need to deliver health care. You still need secure borders you still need to have the right infrastructure to drive the nation. And so we're seeing exactly that, that the missions are enduring the same ones that we have invested in for years, but the focus area has changed and now they're really ready to move forward to impact.

I appreciate that. And with respect to capital deployment, you've got a strong balance sheet this is a period of significant change. Do you expect to lean in and utilize the balance sheet more to affect change in the portfolio? and maybe inclusive in your response, could you talk about the EO and share repurchase and whether or not you feel constrained in future repurchases as a result?

Yes. Let me start by saying -- let me start with the EO. The EO was focused on making sure the defense contractors, especially the ones that the Department of Warfield are underperforming. Got back up to track and make sure that they invested consistent with the requirements in order to to create the capacity and then to prioritize the government's missions. I think Booz Allen is already there, in addition to the fact that our much more less capital intensive. We are very proud of our delivery, and we do not have any performance issues. So we don't think that on the whole domain, the EO applies to us in a negative way.

Having said that, to the other part of your question, absolutely, right? I mean our capital deployment priorities remain unchanged. And the balance sheet is strong and it's a strategic asset, and we continue to look for, call it, smaller but impactful M&A that can behave as a strategic accelerator especially in the growth vectors that I -- that we've been talking about all morning. And so hopefully, you'll see us be more active, especially in those areas.

Beyond that, of course, we'll continue to support the dividend and then share repurchases become something that's more opportunistic. Because obviously, our investors should not want us, do not want us and we don't want to have an idle balance sheet.

So that's the overall thought process. But we're very focused strategically on reaccelerate and reigniting our growth and to do it in a very focused way.

And this will conclude our Q&A session, and we'll pass it back to Horacio for closing comments.

Thank you, Carmen, and thank you all for your questions this morning. I hope the discussion convey that even in what remains a complex and challenging environment, Booz Allen is on track, both operationally and strategic, and that our people are focused every day on building and delivering technologies that create value for our company, for our nation and for our investors. And as we close, let me share my excitement about 2026.

It's not only the things that we talked about this morning that give me confidence and optimism about the future. But this is a special year, and I'm excited for our company-wide celebration of America's 250th birthday, we're planning a year of company-wide events to live our purpose and especially to show our commitment to passionate service both by ramping up our work in our communities and also certainly our work on these critical missions.

And with that, thank you all for joining us, and have a great day.

That concludes our program. Thank you for participating, and you may now disconnect.

Good morning, and thank you for standing by. Welcome to Booz Allen Hamilton's earnings call covering Second Quarter Fiscal Year 2026 Results. [Operator Instructions]

I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg.

Thank you. Good morning, and thank you for joining us for Booz Allen's Second Quarter Fiscal Year 2026 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, Chief Executive Officer and President; Matt Calderone, Executive Vice President and Chief Financial Officer; and Kristine Martin Anderson, Executive Vice President and Chief Operating Officer.

As shown on the disclaimer on Slide 3, please note that we may make forward-looking statements on today's call which 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. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements.

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 second quarter fiscal year 2026 earnings release and slides. Numbers presented may be rounded and as such, may vary slightly from those in our public disclosure.

It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on Slide 4.

Thank you, Dustin. Welcome, everyone, and thank you for joining today's call. This morning, Kristine, Matt and I will share our financial results for the second quarter of fiscal year 2026. The headline for our call today is that the reacceleration of our business will take longer than we expected when we spoke last quarter. As a result, we are lowering top and bottom line guidance for the year. As I will describe in a moment, this is based on continuing friction in the overall procurement environment and fundamentally different dynamics within our civil and national security portfolios. By national security, I mean the combination of our increasingly integrated defense and intel businesses.

At the same time, and despite these near-term headwinds, we continue to see strong performance in our most exciting growth vectors. This success fuels our optimism for the medium term. In a few moments, Matt will take you through our quarterly results in depth and cover how they differ from our original expectations.

Before that, I would like to describe the market and how it impacts our business differentially, where we see growth coming from in the near and medium term and the actions we are taking to compete and win in the current environment and to set us up for long-term strategic and financial success.

Beginning with the market. This is the most bifurcated environment I have seen in my decades with Booz Allen. Our civil and national security portfolios are experiencing completely different dynamics, and we believe both face different prospects over the coming quarters.

Our civil business is operating in the most challenging market in a generation. Over the past 9 months, the pace of change in civil agencies focus on funding has moved at extraordinary speed. As we shared in May, this resulted in run rate cuts in some of our large technology contracts. Since then, the business base has stabilized and we have seen some growth in pockets. However, the procurement environment and our near-term pipeline in civil have not recovered.

Our second quarter is typically the most active as it coincides with the end of the government's fiscal year. This year, we saw no major procurement actions nor plus ups or cuts on any existing contracts. And we also did not see nearly the typical pace of tactical selling. Given this environment, we expect our return to growth in civil to be delayed by several quarters. When exactly that happens, will depend on how funding and contract activity evolves. For our part, across all levels of government, we're discussing potential opportunities that align to the administration's highest priorities, from critical minerals to border security. These are excellent and very promising conversations.

There are also several large RFPs in our growing medium-term business pipeline including new work and recompetes. Looking ahead, our focus in the civil business is to maximize our AI capabilities and commercial technology partnerships to revolutionize delivery and reignite growth. The dynamics across our defense and intelligence markets, broadly speaking, our national security portfolio, are fundamentally different from civil and are much stronger. There remains some friction in the funding process, characterized by shorter funding increments and slower ramp-ups in new contract wins. Despite this friction, the pace of awards in international security portfolio has been encouraging.

Of our $7.2 billion of gross bookings in the quarter about 90% were in national security. This includes the almost $1.2 billion [indiscernible] task order, where Booz Allen will help the Air Force Research Laboratory to increase for fighting lethality through adoption of advanced technologies. We also won 3 other notable awards valued at over $800 million each, including a competitive takeaway win with the United States Army National Guard, Intelligence and Security Directorate and 2 wins at the Defense Intelligence Agency, where we will modernize military intelligence and deliver new AI/ML capabilities in global no fail missions.

Booz Allen continues to win in national security because we bring our unparalleled technology and our depth of mission expertise to the fight. Looking more broadly across our national security work, our leading positions in cyber, AI and war fighting tech are highly relevant to the Trump administration's technology and mission priorities. Our cyber business is increasingly differentiated. Our Thunder Dome product is becoming the standard for Zero Trust. We met all the government's milestones 2 years ahead of schedule. And just last month, it won the 2025 Cybersecurity Breakthrough Award.

We also continue to be the largest provider of AI to the federal government as [ Deltek ] recently reaffirmed. And cyber, AI, a new hardware and software [indiscernible] converge, we are building the tech that makes Booz Allen unbeatable at the edge. Some of you actually had the opportunity to see our edge technology at AUSA and our recent investor event. From our modular detachment kit or MDK, to attack [indiscernible] solution, and our exquisite tactical gear, we are combining our own tech with the best commercial products to empower and protect our nation's war fighters.

As we look at this year and beyond, we continue to see top line growth in our national security portfolio and the potential for expanded margins as the transition to fixed price and outcome-based products and solutions takes hold.

Now reaggregating our portfolio and looking across the entire company, we did not see the normalization of the procurement and funding environment that we originally assumed. I am disappointed in our results this quarter and that we are lowering guidance across all key metrics. Simply put, the strength in our national security portfolio cannot offset the current year decline in our Civil business. This has led us to reassess our market assumptions and to take bold and significant action immediately.

We are well prepared to operate in a highly fluid and dynamic environment for the foreseeable future. There are significant opportunities ahead. For example, in the funding of priorities from the One Big Beautiful Bill, the prioritization of AI adoption across all aspects of the federal government and the increased pace of converting contracts to [indiscernible]. But there are also headwinds like the government shutdown, the decrease in the acquisition workforce and the continued reevaluation of civil agency priorities.

Booz Allen's goal is to remain focused and nimble in this environment so we can accelerate into the more clear and proving growth vectors in our portfolio, areas where we have clear technology and mission leadership. And to do so, our strategy is threefold. First, we are reducing costs by accelerating the use of AI in our internal operations and simplifying our operating model. We're also making the difficult decision to reduce layers and numbers in our senior ranks. These actions will allow us to continue to invest in our priority growth areas and accelerate decision-making. Matt will describe the impact and timing of this program shortly.

Second, we are focusing our investments by doubling down on our strengths. This means flowing investment and talent to a few key areas where we are currently experiencing strong growth and that we believe can be accelerated further. Our primary areas of focus for the near term include cyber, both in the government and commercial markets; artificial intelligence, including growing areas like Agentic, physical and adversarial AI; war fighting tech, especially in edge technologies and mission systems; critical national security programs, specifically scaling our work in ongoing missions supporting the war fighter both at home and abroad; tech ecosystem partnerships, including existing partnerships like NVIDIA, AWS and Shield AI, our own venture portfolio; and new concepts and ideas with the best companies in Silicon Valley. And of course, continued emphasis on new tech from Quantum to AI-native 6G. Booz Allen will lead in the next waves of technology as well.

And third, as the administration accelerates the transition to outcome-based contracting and commercial solutions, Booz Allen is leading the way. We are working with our customers to convert existing contracts and procure new work using these models. We are working diligently to productize more of our including our breakthrough ground systems and fire control solutions proposed for Golden Dome. These approaches will provide greater cost savings and certainty for our customers and provide us with margin expansion opportunities as we gain greater flexibility in how we deliver.

I believe that these steps, taken in combination, we'll expand our market leadership in key areas, accelerate the implementation of VoLT and importantly, strengthen our financial performance. In short, we are making bold moves in the areas we can control. Every period of adversity has made us stronger, and this one is no exception. We are transforming ourselves at breakneck speed. And I am deeply committed to ensuring Booz Allen is an essential player in driving America's technological superiority. Thus, I remain very optimistic about the future of our company.

And with that, Matt, over to you.

Good morning, and thank you for joining us today. As Horacio noted, our business performance remains bifurcated. Our second quarter performance and revised guidance for the full fiscal year reflect this dynamic. In large portions of our business, we have real momentum, and we have a number of reasons for optimism about our medium-term financial performance. Most important, significant portions of our business are growing, and are positioned for continued growth. We anticipate that for the full fiscal year, our national security portfolio, inclusive of our Defense and Intelligence businesses will grow revenue in the mid-single-digit range.

We won $7.2 billion of new work in the quarter, including 4 programs of over $800 million in our national security portfolio. We continue to build the technology that our nation needs and are rapidly expanding the network of commercial tech partners with whom we innovate. We have the ability to adjust our cost structure to meet near-term demand patterns, ensure we are cost competitive and create capacity to invest for the future.

And finally, our balance sheet remains strong, and we continue to generate significant cash flow. This is a real strategic and financial asset. That said, we clearly experienced more disruption in the first half of our fiscal year than we anticipated, particularly in our civil portfolio. This is due to a number of factors. First, with the amount of change we are seeing in government, procurement cycles are stretching. New initiatives are seeing longer lead times and funding is coming in smaller increments. While the pace of contract funding improved over the course of our second quarter, it still lagged the prior year by 3%. And as a result, our funded backlog was down 6% year-over-year.

Second, while our civil business has stabilized, and we have not experienced any negative contract actions beyond those discussed in the first quarter, there has been a substantial gap in procurements in the broader civilian space. We expect to see pricing pressures on large procurements, including a few notable recompetes. As a result, we now anticipate that our Civil business revenue will decline in the low 20% range for the year.

Third, as stated previously, our Civil business has a proportionally larger share of fixed-price contracts and therefore, has historically generated higher profit margins than Booz Allen on the whole. Thus, our overall mix shift away from Civil is putting downward pressure on our margins in the near to medium term.

And finally, the duration of the government shutdown has introduced an additional layer of friction into the system. We expect this will have a modest negative impact on our revenue and profitability for the full fiscal year.

Echoing Horacio's earlier remarks, we previously stated that our FY '26 guidance was predicated on a normalization of the funding environment, particularly in our second quarter. While funding did pick up over the course of the quarter. In fact, September funding was consistent with the year prior. The overall pace of funding was meaningfully slower than the prior years. As a result, our business did not reaccelerate as we had forecast, and we now anticipate that our return to growth in the business overall, will require a few quarters. Due to these factors, we have revised our fiscal year 2026 guidance down across all key metrics.

In our revised outlook, we assume that current funding and procurement trends persist through fiscal year-end, and therefore, they're on contract and new award growth relative to bookings will remain slower than in years past. Make no mistake, this is not the year that Booz Allen wanted to deliver, and we are taking significant actions in response.

As Horacio stated, our focus going forward will be on 3 areas: doubling down on areas of our business where we see significant growth potential, working with our customers to convert how the solutions we build are bought in a more commercially oriented outcomes-based approach and restructuring our business to take out a net incremental $150 million of cost on an annualized basis. We have identified where this cost will come from and have already begun to take action. This will provide a modest benefit to our bottom line financial results this fiscal year. The full impact will be felt next fiscal year.

We expect that these actions will support our margins returning closer to historical levels in fiscal year 2027, while having a modestly negative impact to revenue on our cost-plus contracts. Critically, these actions will also create room for continued investment in core technology and talent, allow us to be more competitive and increase our speed and agility to match the pace of the market. These are meaningful actions and are taking real effort. Some have long been in the works, some are painful, but necessary in a time of rapid change. Collectively, they support our VoLT strategy and our long-term vision for Booz Allen. And ultimately, they will position Booz Allen for an exciting new wave of growth and to deliver superior value for our shareholders.

With that context, let's take a deeper dive into our second quarter results. For the quarter, gross revenue was $2.9 billion, an 8% decline over the prior year period, roughly a 9% decline on a revenue ex billable basis. Adjusting for the onetime reduction to our provision for claim costs in the second quarter last year, gross revenue was down about 5% year-over-year. Inside of these overall numbers, our market performance was not uniform. Our national security portfolio of defense and intelligence programs continues to grow.

For the quarter, this portfolio was up 5% year-over-year, exclusive of the discrete items from the prior fiscal year. And we anticipate this portfolio will grow in mid-single digit range for the full fiscal year. In contrast, revenue in our Civil business was down 22% year-over-year, exclusive of the prior year discrete item. We anticipate that our Civil business revenue will decline in the low 20% range for the full fiscal year.

Moving to demand. We had a solid sales quarter, both in volume and in quality, particularly in the context of a complex macro environment. Gross bookings totaled $7.2 billion in the quarter, including 4 awards in our national security portfolio with a value of greater than $800 million. These were partially offset by 2 distinct items: one, a typical in nature and the other consistent with seasonal patterns.

In the quarter, we recorded about $1.1 billion in contract ceiling reductions, the majority of which pertained to fiscal year 2028 and beyond. These stemmed from our engagement with the new administration to identify out-year cost reduction opportunities, particularly as we shift to more outcome-based contracting. We believe this is a nonrecurring event, and it has had minimal impact on our run rate on these contracts.

Second, about $1.3 billion of backlog expired during the quarter. This reflects the routine expiration of contract ceilings and is in line with historic Q2 levels. As a result, our net bookings for the second quarter were $4.8 billion. This translated to a quarterly book-to-bill ratio of 1.7x and a trailing 12-month book-to-bill of 1.1x. Excluding the out-year ceiling removal, book-to-bill was slightly greater than 2.0x for the quarter and 1.2x for the trailing 12 months.

Total backlog at the end of the quarter reached $40 billion, up 3% year-over-year. Funded backlog grew about 34% sequentially to roughly $5 billion but was down 6% year-over-year. At the end of the second quarter, our qualified pipeline for the remainder of FY '26 stood at nearly $25 billion. This is roughly on par with the prior 2 fiscal years.

In summary, we continue to see solid demand signals in a market that is bifurcated in the short term. We remain confident that as the macro environment stabilizes and we lean into our proven growth vectors, Booz Allen will be well positioned to return to growth.

Pivoting now to headcount. Booz Allen ended the first half with roughly 33,000 employees. Our customer-facing staff was down about 3% sequentially in the quarter and is now down 10% year-over-year. These declines largely reflect lingering effects from contract run rate reductions in our civil business as well as deliberate actions to improve utilization of existing staff.

We are running the business efficiently. Our customer-facing staff utilization in the second quarter was meaningfully above the prior year period. Operationally, we continue to align our workforce with our key growth vectors, including accelerating hiring in critical mission and technology areas. We continue to hire aggressively in meaningful portions of our business to support new wins and other growth opportunities.

I will now turn to profitability. During the second quarter, we delivered $324 million in adjusted EBITDA, down 11% from the prior year period. This translated to an adjusted EBITDA margin of 11.2%, 40 basis points lower than the same period a year ago. Through the first half of the fiscal year, our adjusted EBITDA margin was 10.9%. We expect margins to decline in the second half of the year due to 3 factors: the timing of contract write-ups and award fees, seasonal spending patterns, and continued mix shift away from [indiscernible]. This will be offset to some degree by the part year impact of our cost restructuring actions as well as our shift to outcome-based sales.

Moving down the P&L. Second quarter net income was $175 million, down 55% year-over-year. Adjusted net income was $183 million, down 21% versus the prior year. Diluted earnings per share was down 53% year-over-year to $1.42 per share, and adjusted diluted earnings per share decreased 18% year-over-year to $1.49 per share. The year-over-year declines in diluted earnings per share and ADEPS were driven by 4 factors: lower overall profitability with an unrealized investment gain and tax planning initiatives that benefited the prior year quarter and higher interest expense. These were partially offset by a reduction in share count compared to the prior year period.

Transitioning now to the balance sheet. Our balance sheet remains strong and allows us to be proactive and opportunistic in how we allocate capital to create shareholder value. We ended the second quarter with $816 million of cash on hand, net debt of $3.1 billion and a net leverage ratio of 2.5x adjusted EBITDA for the trailing 12 months. Free cash flow for the quarter was $395 million, the result of $421 million of cash from operations plus $26 million of CapEx.

Turning to capital deployment. In the quarter, we deployed a total of $279 million to generate value for shareholders. This included $208 million in share repurchases at an average price of $107.15 per share. We repurchased nearly 2% of outstanding shares in the quarter, $68 million in quarterly dividends and $3 million in strategic investments made through Booz Allen ventures.

Today, we are pleased to announce that our Board of Directors has approved a quarterly dividend of $0.55 per share, which will be payable on December 2 to stockholders of record as of November 14. Our Board has also approved an increase of $500 million to our share repurchase authorization, bringing our available capacity to approximately $880 million as of September 30.

Finally, please turn to Slide 7 for our forward outlook. As we have discussed, our original FY '26 guidance is predicated on a normalization of the funding environment. While funding and awards picked up over the course of the quarter, this pace remained meaningfully slower than in prior years. As a result, our top line and bottom line performance for the second quarter was below our forecast and we are reducing our fiscal year 2026 guidance across all key metrics. We now expect to deliver revenue between $11.3 billion and $11.5 billion. We now expect adjusted EBITDA margins in the mid-10% range. This translates to an adjusted EBITDA dollar range of between $1.19 billion and $1.22 billion. We now expect ADEPS of between $5.45 and $5.65 per share. Lastly, we expect free cash flow to be between $850 million and $950 million.

As we forecast our growth cadence for the second half, we now assume that current funding trends will persist through fiscal year-end, and therefore, the on contract and new award growth relative to bookings will remain slower than in years past. Also, at the midpoint, our revised guidance range incorporates the loss of approximately $30 million in revenue and $15 million in profit related to the government shutdown. These estimates assume the shutdown extends through October 31. Although not contemplated in our guidance, if the shutdown does continue for the month of November, we estimate the impact would be roughly within the same range, assuming no material changes in government scope or Booz Allen policy.

So to sum up, our market remains bifurcated and funding levels have not normalized as we had hoped. We are disappointed in our results this quarter and that we are lowering guidance across the board. We are winning significant new programs particularly in our national security portfolio, where we are pleased with our growth trajectory. We are taking significant actions immediately to adjust our cost structure and prepare us to reaccelerate growth and profitability. We are doubling down on the key growth sectors where we have real traction in the near term, primarily our differentiated positions in cyber, artificial intelligence, war fighter tech, and critical national security programs.

Our focus is on positioning Booz Allen to accelerate performance into next fiscal year and beyond, and we are confident that we will be able to do so.

Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Louie DiPalma with William Blair.

given the shutdown in your high exposure to the federal civilian agency. Many investors were anticipating a guidance reduction. Horacio and Matt, you both used the term bifurcation several times and you also mentioned how funding in the month of September was actually consistent with last year's September. I'm drilling into that, are you receiving signs and indications that the funding environment for the defense and intel business is actually improving and getting back to normal? Or is this funding environment expected to be strained for your defense and intel business even after the government restarts and the shutdown?

Louis, why don't I start? Thank you for the question. I think the notion of bifurcation is an important one as we look at the business, as we understand the business, I hope you will understand it as well. As I said in the prepared remarks, we see our Civil business operating in the most challenging market in the generation. To give you a sense of what Matt described as a gap in funding, we saw essentially every procurement slide to the right in lockstep and that's not something I have ever seen before. And as we look forward, we're not trying to predict the future as much as react and anticipate what's right in front of us. And so that's how we're thinking about it.

By contrast, in our national security business, it's a much stronger environment. There's still friction though. The government shutdown certainly backs things up. If we end up in the continuing resolution environment, how the CR is written will have an impact on this. But as we think about it, we have these very significant wins. We're very happy to share with you this morning about we are not anticipating a very fast ramp-up on those wins. We're anticipating the ramp-up on those, in fact, to be below historical levels. It will ramp up but simply more slowly. And I think that's everything that we are talking to about this morning is predicated on the notion that there's -- that this friction is going to continue, not impede our growth, but continue.

Now having said that, I think the key for us, as we're trying to describe this morning is to stay very nimble and to stay very focused. Staying nimble means not trying to predict long term but really trying to anticipate the short -- medium term and react as quickly as we can. Part of the cost actions that Matt described to you are a part of that in both to secure our financials and give us more capacity to both invest and react to pricing more nimbly but also to streamline our operating model so we can make the issues faster and move faster.

And the second part is to be very focused. I am personally very excited about what I'm seeing in our cyber business, both in government and commercial our AI capabilities are in greater and greater demand. I think you saw, and hopefully, we're impressed by the war fighting tech day that we hosted last week, which is really becoming a crown jewel in our portfolio, some of this critical national security contracts -- or we support such important missions and do such great work there.

And then the partnerships with the tech ecosystem which are really both giving us access to new opportunities that are more commercially focused and enhancing our go-to-market and our capabilities because we can move faster when we build on top of their tech. So when we take it all, obviously, we're not pleased with the results or the near-term guidance lowering, but that's how we see the environment.

And for the rest of the year for the civilian guidance of, I think, negative 21%. What is assumed year -- what is assumed there in terms of the government shutdown and further cuts to existing programs? Are you assuming that other programs are throttled or what is baked in the assumptions because investors are -- they want to know whether there's going to be another cut to the federal civilian business and if this is going to be in a perpetual cycle. So what gives you confidence that this is the last guidance reduction for the [indiscernible] civilian business?

Yes, I'll start, and then Kristine may want to provide some color as to what's happening in the Civil business. As we said in the prepared remarks, we didn't actually see any actions positive or negative in civil last quarter. So we didn't see any additional cuts. We also didn't see any plus-ups or new awards and new procurements and what have you. So if you look at our civil portfolio, outside of a number of large programs that we've talked about, that portfolio is going to be essentially flat, both at the top and the bottom for the year. I think which just sort of indicates sort of the state of where we are in many of those agencies. But those large programs matter, and that's why we're guiding down to in the low 20% range at the top. So we aren't anticipating any further cuts.

We are anticipating a very competitive procurement environment with some pricing pressure, particularly on the large program side. We also are having great conversations with folks in the administration about some of our key priorities. So we've used the word stabilized in civil, and that's what it feels like, but stabilized after a fairly significant run rate on our pretty large programs in an environment where things just aren't moving very quickly.

But Kristine, I'm sure you want to chime in there.

Thanks, Matt. Yes, the business is stable, as Matt said. The environment itself still continues to be very slow with very few new large bids and not much ramp-up in funding. But I think that reflects the administration's rethinking how they want to prosecute some of those missions. And the work that we do in civil is impressive technically, and it is aligned to the administrative priorities. For example, we have one of the largest Agentic AI software implementations in the world and it's in civil and we're leading in Agentic AI. And we do expect work to grow there again. And we are having lots of productive conversations with the administration leaders on some of -- some new approaches to the core missions where we're bringing commercial solutions and combining it with our IP and IC, their outcome-based commercial offerings that we're talking through. But again, it's just hard to predict exactly when those will launch -- and so as Matt said, we're just assuming the status where we are now continues through the rest of the year, but we do see growth over the medium term.

Thanks, Kristine. So was there stabilization in the Civil business from the -- in the September quarter relative to the June quarter?

I'd say, yes. Yes, it's been pretty steady since the reductions that we had a while back in the year.

Yes. But stable, it means we didn't -- again, there were no new decrements, but we also didn't see some of the on-contract growth in plus ups and typical velocity of tactical selling in Q2 that we would -- that we'd anticipated.

Yes. Louie, when we talk about bifurcation, another way to think about it is if there's upside and downside in -- across all of our business, there always is. I would say, as we sit here right now, maybe a little more downside potential in the civil business, a little more upside potential in the national security business. But as I said before, I mean, the things change very quickly. And we could -- what we're trying to do is, like I said, it's flow of resources, flow investment to where we see the opportunities and not be married to a particular outlook, but rather just ensure that when there is an opportunity to grow, we double down on it.

Our next question come from the line of Sheila Kahyaoglu with Jefferies.

Maybe 2 questions. The first one, a bit shorter term and bigger picture for this next one. So first, I guess, I think you guys have previously talked about the civil portfolio being 13% margins or so, which implies defense and intel is in the 8% to 10% range. Is that still the right way to think about the profitability for [indiscernible] customers?

Yes, that's in range, Sheila. We never quantified it that way, but we've talked about how Civil has a significantly higher proportion of fixed-price contracts. So that's roughly in range.

Okay. Got it. And then maybe a bigger picture question, Horacio, for you. How do we think about the business model for Booz longer term, just given pendulums clearly shift and maybe 3 years from now, it will shift back where we're scrubbing our models for national security exposure and saying Civil will grow again double digits? So how do you think about aligning the sales force and the workforce and your management team as you restructure the business a bit?

One of the hallmarks of our operating model is the notion that we operate in a single P&L, and that gives us the ability to respond to the market across any arbitrary lines really fast. We always have. We -- every time, as you point out, an administration transitions, they refocus their priorities. As I said before, this is perhaps one of the most significant or the most significant refocusing that I've seen. But we're going to continue to make sure that we are taking advantage of our broad footprint to go where the opportunities are.

The other piece of it is I do believe that because of the way technology has evolved more broadly, this idea of injecting commercial technology into missions, moving to outcome-based as opposed to input base models, and those big trends are going to continue well into the future. They were somewhat underway before. I think there's an accelerant right now as the Trump administration doubles down on a lot of this. But I don't see us going back. And so that's why we've invested so much time, so much effort and resources on building partnerships from the very largest tech companies to small startups with promising technology and everything in between.

I think our position in this tech ecosystem I think gives us a long-term edge that we're just beginning to see realized just beginning to exploit. There's a couple of opportunities right here right now that we are chasing. One in civil and a couple of national security, that would be impossible without the strong partnership that we have with some of these companies. And the more people see Booz Allen as somebody who builds tech but also leverages tech that others build to create the right answer, I think the more power we're going to have in the market.

[Operator Instructions] It comes from the line of Colin Canfield with Cantor Fitzgerald.

So it sounds like the [indiscernible] reduction, Matt suggests there may be a little bit of downside in terms of the cost plus nature of the business. So as we do the building blocks on '27, if we assume Civil's down another, call it, 10% and Defense and Intelligence is accelerated to call it mid-single digit. We think the building blocks probably suggest something like 0% to 2% organic that should notionally accelerate and '28 off of that base. So, a, does that math make sense at a high level; b, fundamentally can you grow next year; and then, c, if not, when do you expect this business to return to growth?

Yes. Thanks, Colin. Look, I think a couple of things. One, as we talked about, we had a lot of momentum in our national security portfolio. Two, the Civil business is stable, right? And unfortunately, we saw a significant decline in the first half of this year. But obviously, our comps will get proportionately easier given where we are. I'm not going to get into next year. We got a lot of medium-term optimism. There are some significant building blocks. As Horacio said, the nature of this market is such where things are happening fast. And we've got some exciting opportunities in the fire. So I would not necessarily straight line the math exactly how you did, Colin, but I'm sure we have in this conversation over the next couple of quarters.

The only thing I would add to that is, as we described the growth vectors that we're talking to you about, clearly, the national security market is more robust. And so we'll see those growth vectors play more strongly there. But the number of things we're talking about around cyber, around AI, around some of the tech that we're developing that is highly applicable to border security, to large event security to the upcoming World Cup and so forth, we are looking for opportunities to leverage and grow in the parts of our civil business that are most aligned with the administration's priorities and we're -- we will continue to do that pretty aggressively.

Colin, if I could just jump back in here. Two other thoughts for you. One is we are seeing an increasing pace of contract conversion to outcomes based. While small, the portion of our -- our natural security portfolio at fixed price did increase quarter-over-quarter, and that's certainly the direction of travel and in part because of that, but also other dynamics. I do think going forward, our growth will be not as linearly connected to head count growth for a handful of reasons. If I can just give you a couple. The vast majority of our FTE loss this year was in Civil, and that's where we have more of our fixed price contracts. And that revenue is not as "headcount" dependent.

Second, we're driving up utilization. And then third, the mix shift that I just described. So I understand we've had a fairly stable business model and that's relatively easy to model for you externally. Those dynamics are changing, consistent with the kind of pace of change that Horacio was talking about, and we'll continue to engage with you over the coming quarters.

Got it. Got it. So margin trough this year gets better over time and then growth is [indiscernible] is kind of my takeaway. I appreciate that the businesses have managed on a quarter-to-quarter basis, but putting an investor hat on for a bit. As we think about the next quarter, what would you fundamentally tell an investor that wanted to go short again next quarter? And then kind of why are the reasons would you expect that to be a bad idea?

[indiscernible] business is giving investment advice Collin.

Our next question is from Mariana Perez Mora with Bank of America.

When you guys think about the new guidance, I'd appreciate some color around like how much is already in backlog, how much you have to go and like win and is still depending on like some contracts that could be delayed? Like could you give us some kind of like measure of how strong is that backlog coverage and also the pipeline and like if you have like any amount of like how that pipeline appears to a year ago or something?

Yes. Mariana, I think we're in the main anticipating that the current sort of burn rates and trends largely persist, that head count remains essentially flat obviously absent the cost reduction initiative that we described. And it's not really based on any significant new wins. But that does require some on-contract growth, do wins to ramp up and a handful of other factors. So we've -- in this current guidance, attempted -- there's not any material things that need to happen for us to land in this range, but it is a volatile situation.

And you mentioned on contract growth. How is your conversation with your customers right now about like certainty about like them needing that kind of growth or still like there is a lot of uncertainty if that's going to happen or where it's going to trend?

I mean I'll start and I'm sure my colleagues are going to want to add. But we're having very productive conversations, especially in the national security side and especially in these growth vector areas that are talking about. So if you take cyber, for example, we expect ThunderDome, as an example, to continue to grow ThunderDome become really both a standard and a product that everybody wants, and we expect to see some level of growth there. A number of other areas in the national security space are -- we are seeing significant pickup.

As Matt pointed out, we have not made any heroic assumptions about that happening in the back half of the year in recognition of the fact that our there is friction in the environment that we're still in the middle of a shutdown and all of that, and we've tried to incorporate that into the way that we're thinking -- on the one hand, on the other hand, we are as aggressive as we've ever been in terms of trying to accelerate past that. So that's sort of the thought process right now.

I would add that the administration really wants to push speed in some areas. So those conversations are extremely productive. And so that continues as well.

So you mentioned cyber, and the expectations were for that portfolio to actually grow like at speed. How large is that right now? And what do you expect for that portfolio? Again, like the near term has been volatile, but in the next like 2 to 3 years?

I am as bullish about our cyber business as I've ever been for a couple of reasons. First of all, we do occupy a unique position in cyber in the national security space, that is both well recognized internally in the government, and it's a real strength of ours. Second, I always talk about convergence. If you think about what's happening in terms of AI and Agentic and how it affects cyber, 3 ways just to name a couple, right? I mean the attack surface has grown because the AI models themselves have grown -- are now becoming in their own attack surface. Second, adversaries are using cyber much more effectively by leveraging AI into it, and therefore, defense needs to move in that direction. And third, we are seeing across the board, interest in us bringing these capabilities, including in our commercial customers that are both under siege by a number of cyber actors and see us and what we do as being a key player in helping them move past that.

So I think, unfortunately, cyber risks are everywhere, cyber risks continue to grow. And Booz Allen, I believe, has, in essence, the most powerful -- one of the most powerful cyber businesses in the world.

Our next question comes from Gavin Parsons with UBS.

I just wanted to unpack the disconnect between awards and funding a little further, if we could. Is total backlog still a good leading indicator of demand and growth?

Yes. Long term, but I think, obviously, short-term funded backlog matters, right? And our funded backlog -- our funding was down in Q1, 9% year-over-year, in Q2, 3% year-over-year, which nets out to 6% for the first half. So I think it shows the direction of travel, the funding environment has improved, but in no way normalized over the first half. Now there's a lot of noise in there, particularly in the current environment, as Kristine said, we're seeing shorter funding come in shorter increments. It's a little more episodic. So it's not a linear relationship as it used to be. But obviously, 4 words of scale, that's going to drive growth. I think one is a pure recompete, one was a recompete with increased ceiling, one was a new award and one was a takeaway. So again, we are less comfortable that it's going to ramp as quickly as we've seen in the past, and we built that into our guidance, but backlog absolutely matters.

And our last question comes from the line of Tobey Sommer with Truist.

Could you discuss your process for determining how much growth investment to allocate and how you balance that against where you were targeting near-term profitability and head count cuts that's sort of a tight rope and there's tension there? And maybe you could discuss how you arrived at your decisions?

I guess I'll start. Look, I mean, as somebody pointed out earlier, we do not manage this company for the quarter. We managed the company for the medium and long term. And we are making the investments that we believe are both prudent in terms of long -- short-term profitability, but important and exciting in terms of long-term growth at both the top and the bottom line. And look, that's always been the case. It is the case now. We're undertaking a difficult decision of doing some significant cost reduction in some ways to ensure that we can both deliver in the short term, really more focused on our FY '27, given where we are in the year, but also so that we have the capacity to stay nimble and invest in the areas where we see the most opportunity.

And I think that, that is what's exciting about Booz Allen Hamilton. I mean I can talk to you about things that are growing now. I can talk to you about things that are -- we believe have significant growth potential in the short term, and I can talk to you about the things we are doing like Quantum and like AI-based 6G that I believe will fuel growth in sort of in the third horizon. And so that needs to continue, while at the same time, recognizing that we have work to do in order to drive the short-term financials to where we want it to be.

[indiscernible] I mean, we're an interesting spot because obviously, we're disappointed with our performance and our guidance. And as I look inside of our portfolio, there are actually more demand and more opportunities to invest to drive medium- and long-term growth than I remember in a long time because as Kristine and Horacio said, it's an incredibly dynamic environment. This administration wants change. We're seeing significant opportunities, not just in the U.S. government, but even in commercial and with similar allies. And so part of the internal dialogue and part of the reason we're taking these painful actions to free up $150 million worth of cost is precisely because we see these investment opportunities.

So we're prioritizing the growth vectors that we've all described, but there's real opportunity here. And that's, in many ways, more of a driver of us taking these cost actions than hitting short-term set of financial results.

If I could ask another question on SIML. Amita once in a generation change to the top line and demand. Do you assume that the margin holds because it's relatively unusual for significant sort of TAM changes not to be accompanied by margin compression?

Yes, that's a great question. I mean, overall, yes, but there is competition for price that we're expecting because there'll be fewer bids, there will be more bidders, there will be much more aggressive pricing. But that's at the same time that we are able to use a lot more technology to innovate how we deliver, which would still preserve margin.

Thank you. And this concludes our Q&A session for today. I will pass the call back to Horacio Rozanski for concluding comments.

Thank you, everyone, for joining us today. I hope this discussion gave you a deeper understanding of the factors that underlie our performance, how we see the market, how quickly we are responding and our reasons for optimism about the future of Booz Allen, which include both our leading position in advanced technologies by how we apply them to critical missions in a way that we build things that work, our agility, our willingness to move fast and our capacity to invest and accelerate our growth vectors. And really, most importantly, the people of Booz Allen and the quality of our team, which continues to be extraordinary and it's a source of optimism for all of us.

And so together, we are moving forward, and we want to accelerate both our mission impact and our financial performance, and we are focused on doing so. Thank you again, and have a great day.

And thank you. And this concludes our conference. Thank you for participating, and you may now disconnect.