Booz Allen Hamilton Holding Corporation (BAH) Q3 2026 Earnings Call Transcript
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Overview
The earnings call summary indicates mixed signals with reduced revenue guidance, civil business decline, and uncertain government impact, despite positive contract activity and partnerships. The Q&A reveals optimism in AI and defense but lacks concrete civil sector recovery details. The strategic plan shows potential but is overshadowed by fiscal challenges and cost restructuring impacts. The overall sentiment leans negative due to weaker guidance, civil sector setbacks, and limited clarity on recovery, likely leading to a stock price decline of -2% to -8%.
Key Financial Performance
Gross Revenue $2.6 billion, representing a roughly 10% decline versus the prior year period and a 7% decline on a revenue ex-billable basis. Adjusting for government shutdown impacts, gross revenue in the quarter was down about 6% year-over-year. The decline was attributed to the government shutdown and timing delays in billable expenses.
National Security Portfolio Revenue Declined about 1% year-over-year in the quarter, inclusive of the impact of billable expenses shifting out of Q3. Adjusting for the impact of the government shutdown, the portfolio grew about 4% year-over-year. The decline was due to the government shutdown, while the adjusted growth reflects underlying demand.
Civil Business Revenue Declined about 28% year-over-year. The decline was anticipated and attributed to the reset of the business.
Net Bookings $888 million for the third quarter, equating to a quarterly book-to-bill ratio of 0.3x and a trailing 12-month book-to-bill of 1.1x. The decline in bookings was due to the government shutdown causing delays in funding actions and shifting award activities to subsequent quarters.
Backlog Record year-end backlog of over $38 billion, up about 2% over the prior year. The increase reflects strong demand despite friction in the funding environment.
Adjusted EBITDA $285 million for the third quarter, translating to an adjusted EBITDA margin of 10.9%. The strong margin performance was driven by disciplined cost management and strong contract execution.
Net Income $200 million, a 7% increase year-over-year. The increase was driven by lower effective tax rates and a lower share count, partially offset by lower operating profit and slightly higher interest expense.
Adjusted Net Income $215 million, an increase of about 9% from the prior year. The increase was driven by lower effective tax rates and a lower share count.
Diluted Earnings Per Share (EPS) $1.63 per share, a 12% increase year-over-year. The increase was driven by lower effective tax rates and a lower share count.
Adjusted Diluted Earnings Per Share (ADEPS) $1.77 per share, a 14% increase year-over-year. The increase was driven by lower effective tax rates and a lower share count.
Free Cash Flow $248 million for the quarter, inclusive of $261 million of cash from operations, less $13 million of CapEx. The strong cash flow was attributed to particularly strong collections in December.
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Operating Highlights
Vellox Reverser: AI-native malware reverse engineering product launched for federal and commercial customers. It automates malware analysis, delivering intelligence in minutes instead of days, enhancing cyber defense capabilities.
National Security Portfolio Expansion: Secured a $99 million contract with the Navy's Military Sealift Command for wireless capabilities onboard ships and expanded work with the Navy on unmanned systems and maritime object tracking.
Partnership with Andreessen Horowitz (a16z): Booz Allen committed up to $400 million in a16z's late-stage venture fund to co-create commercial tech for national security, public safety, and healthcare.
Cost Reduction: Implemented a cost reduction program, reducing run rate spend by approximately $150 million to improve agility and create capacity for growth investments.
Transition to Outcome-Based Contracting: Shifted portfolio to fixed price and outcome-based models, including a $100 million fixed price work expansion for the Thunderdome Zero Trust Cybersecurity Program.
DARPA Business Divestiture: Divested a portion of DARPA business to focus on technical performer opportunities aligned with growth vectors like cyber and AI.
Focus on Growth Vectors: Invested in areas like cyber, national security, partnerships, and AI to drive acceleration and innovation.
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Risk or Challenges
Government Shutdown Impact: The prolonged government shutdown caused delays in funding and procurement actions, resulting in a cumulative impact of approximately $50 million on revenue and $20 million on profit for the fiscal year. It also shifted $60 million in billable expenses from Q3 to Q4, disrupting financial and operational planning.
Cost Reduction Challenges: The company executed a cost reduction program, reducing run rate spend by approximately $150 million. While necessary for agility and investment capacity, these actions were difficult and could impact employee morale and operational continuity.
Civil Business Decline: The Civil business experienced a 28% year-over-year decline, with expectations of stabilization but no immediate growth. This poses a risk to revenue diversification and long-term growth.
Funding and Award Delays: The pace of funding and awards was significantly slower, down 32% year-over-year in Q3, leading to a 10% year-over-year decline in funded backlog. This could impact future revenue and operational planning.
Headcount Reductions: Customer-facing staff decreased by 2% sequentially, including 2.5% involuntary terminations. This could affect the company's ability to execute on contracts and support pipeline growth.
Market Environment Uncertainty: The macro environment remains fluid and dynamic, creating challenges in forecasting and strategic planning. This uncertainty could impact the company's ability to achieve its financial and operational goals.
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Guidance & Outlook
Revenue Expectations: Revenue for fiscal year 2026 is expected to be between $11.3 billion and $11.4 billion, reflecting some impacts from the prolonged government shutdown.
Adjusted EBITDA: Adjusted EBITDA is projected to range between $1.195 billion and $1.215 billion for fiscal year 2026.
Adjusted Diluted Earnings Per Share (ADEPS): ADEPS guidance has been raised to a range of $5.95 to $6.15 per share for fiscal year 2026.
Free Cash Flow: Free cash flow is expected to be between $825 million and $900 million for fiscal year 2026.
Pipeline Growth: The qualified pipeline for fiscal year 2027 stands at nearly $53 billion, which is 12% higher than the fiscal year 2026 pipeline at the same point last year.
National Security Portfolio: The national security portfolio is expected to grow, with a 4% year-over-year increase in Q3 after adjusting for the government shutdown impact.
Civil Business Outlook: The Civil business is expected to remain stable through the remainder of fiscal year 2026, with optimism for future growth.
Cost Reduction Impact: Cost reduction actions are expected to drop run rate spend by approximately $150 million, with the full impact on profitability to be felt in the next fiscal year.
Product Launch - Vellox Reverser: Booz Allen is launching Vellox Reverser, an AI-native malware reverse engineering product, to federal and commercial customers. This product is expected to enhance cyber defense capabilities.
Partnership with Andreessen Horowitz: Booz Allen has committed to deploy up to $400 million in a16z's late-stage venture fund, focusing on co-creating commercial tech for national security, public safety, healthcare, and other government missions.
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Shareholder Return Plan
Quarterly Dividend: The Board of Directors approved a quarterly dividend of $0.59 per share, payable on March 2 to stockholders of record as of February 13.
Share Repurchase: The company repurchased $125 million in shares during the quarter at an average price of $95.16, representing just over 1% of outstanding shares.
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Key Q&A
Q:What are the end market expectations for FY '27, particularly for defense, intelligence, and civil sectors?
A:Defense and intelligence are expected to grow, while the civil sector is flat. The civil business is beginning to reignite with a double-digit increase in the pipeline for both national security and civil. Award activity on the civil side is also starting to pick up.
Q:What are the multiyear prospects for the civil sector, considering the downdrafts this year?
A:The civil sector has shifted focus from cloud to readiness of data platforms critical for AI. There is consolidation of platforms within and across agencies. Specific missions include AI-enabled public health, biothreat detection, fraud detection, AI-powered aviation safety data platforms, and AI/ML for multisource intelligence. Healthcare remains a national priority.
Q:What is the status of the cost reduction plan and its impact?
A:The cost reduction actions are complete. Minimal impact was seen in Q3, with a slight increase expected in Q4. The full impact will be realized in the next fiscal year, resetting the margin structure to accommodate shifts in the portfolio caused by civil sector cuts.
Q:What is the pace of contract award activity and the pipeline outlook?
A:Contract award activity has picked up post-shutdown, with December funding more than double that of October and November combined. January has also started strong. The company is pursuing opportunities in AI, cyber, defense tech, and national security, with a focus on growth vectors.
Q:How does the company view the civil sector's return to growth, given the pipeline's double-digit growth but a 28% sequential decline?
A:The civil sector is undergoing a reset, with a shift from cuts to focusing on the President's priorities. Award activity was minimal earlier in the fiscal year but is now starting to turn around. The pipeline is expanding, and on-contract growth is beginning to materialize.
Q:What are the biggest changes in how the company sells to the government?
A:The company has accelerated commercial partnerships and become more agile in market approaches. Examples include partnerships with a16z and AWS for innovative solutions. The company is also focusing on outcome-based work, which is expected to drive profitability.
Q:What is the outlook for headcount and its relation to revenue growth?
A:Headcount was down 12% year-over-year, but revenue and profit per employee have increased. The company expects organic revenue growth to outpace headcount growth, leveraging technology and efficient operations.
Q:What is the status of the $170 million cash tax refund expected in fiscal '27?
A:The $170 million refund is still expected in fiscal '27. There are ongoing cash tax headwinds, including the unwind of Section 174 and state assessments, but the refund remains on track.
Q:How is the company preparing for the possibility of a $1.5 trillion defense budget?
A:The company is focusing on key priorities like Golden Dome, space, cyber, and AI. Investments are being made in growth vectors aligned with national priorities. The company is also building agility into its system to respond to budgetary changes.
Q:What is the outlook for funded backlog and its impact on fiscal '27 growth?
A:Funded backlog is expected to improve as awards accelerate. Positive signs include strong funding in December and January, an improved demand environment, and an expanding pipeline. The company is focused on building momentum for fiscal '27.
Q:What is the competitive landscape and the company's positioning?
A:The competitive landscape has evolved, with new players and commercial competitors entering the market. The company is leveraging unique relationships with tech companies like AWS and NVIDIA to create opportunities and maintain a competitive edge.
Q:What is the company's role in larger programs like Golden Dome?
A:The company is active in space-related areas like domain awareness and ground systems. Specific roles in Golden Dome are not disclosed, but the company expects significant growth in this area.
Q:What is the interplay between defense spending growth and potential fiscal restraint in civil sectors?
A:Defense spending growth may lead to fiscal restraint in civil sectors. However, enduring civil missions like aviation safety, healthcare, and border security remain priorities, with a shift in focus rather than funding cuts.
Q:What is the company's approach to capital deployment and share repurchases?
A:The company prioritizes smaller, impactful M&A in growth areas, supports dividends, and views share repurchases as opportunistic. The balance sheet is considered a strategic asset for driving growth.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the quantitative makeup of civil sector downdrafts over a multiyear period, the exact amount of contract awards expected in the next quarters, and the company's specific role in the Golden Dome program. Additionally, responses about the interplay between defense spending growth and civil sector fiscal restraint were broad and lacked detailed financial implications.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI
CFO
Calderone
DARPA
Martin Anderson
Navy
Slide
action cost
addition
az
benefit
calendar
contracting product
cost action
cyber defense
delay
divestiture
estimate
expansion
funding action
future priority
government shutdown
income increase
industry partnership
investment vector
line expectation
malware
mine
object
outlook remainder
priority term
priority transition
product sale
profitability contract
progress priority
rate
security portfolio
track
transformation
work Thunderdome
BAH Transcript
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Booz Allen Hamilton Holding Corporation (BAH) Q3 2026 Earnings Call Transcript
Unknown1-23
The earnings call summary indicates mixed signals with reduced revenue guidance, civil business decline, and uncertain government impact, despite positive contract activity and partnerships. The Q&A reveals optimism in AI and defense but lacks concrete civil sector recovery details. The strategic plan shows potential but is overshadowed by fiscal challenges and cost restructuring impacts. The overall sentiment leans negative due to weaker guidance, civil sector setbacks, and limited clarity on recovery, likely leading to a stock price decline of -2% to -8%.
Booz Allen Hamilton Holding Corporation (BAH) Q2 2026 Earnings Call Transcript
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The earnings call presented mixed signals: strong technology investments and optimism in defense and cyber sectors contrast with flat civil business and competitive pricing pressures. While full-year guidance is positive, the lack of immediate growth and cautious ramp-up in new contracts tempers enthusiasm. The Q&A highlighted uncertainties and management's non-committal stance on short-term performance, suggesting a balanced sentiment. This leads to a neutral prediction for the stock price movement, as positive long-term strategies are countered by short-term challenges and market uncertainties.
Booz Allen Hamilton Holding Corporation (BAH) Q1 2026 Earnings Call Transcript
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The earnings call shows mixed signals: strong AI business growth and positive strategic partnerships, but concerns over civil business revenue decline and uncertain funding environment. Management's optimistic guidance and cash flow benefits are tempered by unclear responses on key issues and a lack of specific guidance, leading to a neutral sentiment.
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