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F500-2021-391-Booz Allen Hamilton Holding

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Booz Allen Hamilton provides management and technology consulting, as well as analytics, engineering, digital solutions, mission operations, and cyber and cybersecurity services to governments, corporations, as well as not-for-profit organizations in the United States and internationally. Founded in 1914, the consulting firm is headquartered in McLean, Va.

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Booz Allen Hamilton Holding (BAH): Company Profile, Stock Price, News, Rankings

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Booz Allen Hamilton Holding

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Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering fourth quarter fiscal year 2026 results. At this time, all participants are in listen-only mode. Later, there'll be an opportunity for questions. 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 two. 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 three, please keep in mind that some of the items we will discuss this morning are forward-looking and may relate to future events or our future financial performance.

They may involve known and unknown risks, uncertainties, and other factors that may cause 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, 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 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 and CEO, Horacio Rozanski. We are now on slide four.

Thank you, Dustin. Good morning, everyone. Thank you for joining the call. Before diving into our results, I would like to begin by acknowledging two leadership updates we announced last month. First, I am very pleased to have our new CFO, Troy Lahr, with us on today's 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 as CFO of Sierra Space, a defense tech space company. Prior to that, he was CFO of Boeing's defense, space and security business. I am excited to have him on our team. Troy, welcome. 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 two decades.

Today, Kristine and I work together to drive Booz Allen's strategic positioning, business direction, and performance. Naming her President recognizes the extraordinary impact and success she's 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. 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, 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've 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 delivered this bottom-line performance while continuing to invest for future growth. On the strategy front, the moves are simply too many to detail. Here are some examples. We drove significant growth in outcome-based opportunities and contracts. This 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 vectors, including our Vellox suite and our EdgeXtend product lines.

We built a pipeline of opportunities based on unique partnerships, including with NVIDIA, AWS, a16z 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 could control, built 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. 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. 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. 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 that make America safer and stronger. With that, Kristine, over to you to discuss 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 cyberattacks. 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 a year. We are not stopping there. As AI-driven cyberattacks 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 help to contain the adversary's movement when compromise does occur.

We are fast-tracking the development of our Vellox suite of agentic cyber products for both federal and commercial customers. Within commercial, our recently announced acquisition of Defy Security strengthens our ability to scale cyber product sales and expands 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 one area of opportunity ahead of us in national security. Here are two 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. In the fourth quarter, Booz Allen was awarded Breakthrough Engineering and Advanced Technology Solutions, or BEATS.

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 and 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 2027, we will focus on the following operational priorities to drive our return to growth. First, maximize the significant opportunities we see in cyber and defense 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. Fourth, accelerate momentum in Civil by capturing the existing pipeline and continuing to inject new tech 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 earnings call, Troy.

Thanks, Kristine, and good morning, everyone. Before discussing the quarter in more detail, let's turn to slide five 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. 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 PTEMS 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 pre-tax 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 MCTP 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. 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 eight.

For fiscal year 2027, we expect to deliver revenue between $11.2 billion 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-$6.35.

Our ADEPS 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 ADEPS in fiscal year 2026. Lastly, we expect to generate free cash flow between $825 million and $925 million, which includes the estimated impact of expenditures in fiscal year 2027 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.

Thank you. If you'd like to ask a question, please press star one one. If your question has been answered and you'd like to remove yourself from the queue, please press star one one again. Our first question comes from Gavin Parsons with UBS. Your line is open.

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 head count, that'd be great. Second, how should we think about the relationship of funding awards to revenue, given the funded backlog was down last year? Thank you.

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. I feel like we're entering FY 2027 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. We'll continue to see that. Our expectations and our guide are tempered by all of that. I would think about this the following way.

Over time, not all in FY 2027, but over time, we expect to see productivity gains from some of the work that we've done, for example, around delayering, agentifying 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. That is what's going to diverge the curves between headcount growth and revenue growth. As I've said, I would expect that over time, you will see higher profit growth and revenue growth and higher revenue growth and headcount growth. FY 2027 has some unique dynamics because even the headcount 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. Where we're seeing the pickup is in the areas that Kristine talked about, that I talked about. In both cyber and defense tech, our businesses are moving faster towards fixed price, towards outcome-based, towards productizing many of our offerings. 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 structure technology inside a program. That's where you begin to see this divergence. 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.

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. On the funding side, again, you have to temper the dynamics, because 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. That gives us some level of confidence that things are accelerating, and that the wins are going to translate into actual revenue, perhaps not quite at historical rates, but certainly at much better rates than we saw last year.

Thank you. Our next question comes from Louie DiPalma with William Blair. Your line is open.

Horacio, Kristine, Troy, and Dustin. Good morning and happy Friday. I was wondering, has Anthropic's Mythos limited release, has that impacted any of your major cybersecurity programs such as Thunderdome and CDM DEFEND? Has it created incremental positive opportunities? Or what have you been seeing with Mythos? Thanks.

Hey, Louis, I don't think we could trace a direct line from Mythos to a program. 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. This is a year in which the offensive cyber tools, which are agentifying faster than defensive cyber tools, are going to create a gap. Into that gap need to have companies like us with our tools, with the products that we're creating in the Vellox suite and the like. We are beginning to see a huge pickup in those conversations. 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 of four different aspects of our Vellox suite and to try and compress it all into the first half of this year because the demand is now. Things that were not going to be out in the market for another year and a half are in beta with some customers already. Every conversation that we have may begin with Mythos but doesn't end with Mythos.

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 Vellox Striker and you see what we've done in terms of mimicking what an agentic attack tool is for automated red teaming and to be able to train the agentic defense, it'll give you a sense for how much cyber is changing and how much opportunity that creates for us.

Louie, I would also add that this new agentic AI era is really pushing forward the need for zero trust. Zero trust is critical for defense against any kind of attack. We're getting the impact there as well.

Great. 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 and the Space-Based Interceptor, and is it cyber related?

Unfortunately, we are not allowed to talk about our role, Louie. I will say this: We are very proud to be one of the few companies to be able to participate in this program, to have won a seat in this program, and we are definitely bringing our A game, cyber, AI, and everything we do.

Thank you. Our next question comes from Gautam Khanna with TD Securities. Your line is open.

Yeah, I just wanted to ask you to elaborate on the procurement environment and just the pace of contract adjudications broadly across the end markets. 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 Booz. Just if you could clear that up for us. Thank you.

Sure. Thank you. We have definitely seen an improvement in 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 markedly better than it had been pre-shutdown. Also for awards, that's also true. Starting to move at pace again. We are also seeing the pace of new procurements 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. The award environment is strong. Demand is picking up across the entire business.

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 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. 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. We're feeling good about the outlook. We're adding value to customers, don't see that there's a reputational issue there. You see it, that Kristine talked about, in the backlog, and on the book to bill, we're comfortable with where we stand.

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? Thank you.

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. 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. That does put a little bit of pressure. Overall, recompetes look pretty much the same as they have in the past. Nothing specific.

Thank you. Our next question comes from John Godyn with Citi. Your line is open.

Hey, guys. Thanks for taking my question. I wanted to follow up on the revenue guidance. First of all, just 0%-4%, that range, kind of a very normal range. If you don't mind discussing what gets us to the high end versus the low end. I just want to imagine those scenarios alongside you.

Yeah. 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. 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. Overall, again, it's bounded by what we see in the marketplace today, but overall, we're confident in the business and the execution.

Yeah, 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, we've seen in election years that what's the second half of our fiscal, the next government 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. 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, ends positive. It's a very dynamic year. Negative can mean a lot of different things, I just wanted to kind of re-ask the question on shape of the year. If the upcoming quarter is going to look similar to 4Q, that's very different than if it's sort of slightly negative. 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. Thanks.

Yeah. Thanks, John. I appreciate the follow-up and the request for more detail on the quarter. I would say when I look at it, 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 and bound and provide guidance quarter-by-quarter. 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. That's kind of how we see first half versus second half. The strong demand for national security should be pretty favorable throughout the year, probably picking up more in the second half of the year.

Thank you. Our next question comes from Mariana Pérez Mora with Bank of America.

Hey, good morning. This is Alex Preston for Mariana. Thanks for taking the question.

I just wanted to 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 2027?

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. This is a more of a steady increase on fixed price and outcome base as opposed to big step changes. What we have come to realize is that given the level of activity the procurement shops generally have to deal with overall, that they're more likely to entertain that conversation at a contract conversion point, at a time of awarding an option year and the like. Everything that we see suggests that we are going to see a steady move. 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.

That mix didn't experience the dynamic as we expected. 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 base, and certainly the recent EO and upcoming guidance from OMB is going to push our customers in that direction. 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.

Alex, I can just give you a little more color on the margins as we see it for fiscal year 2027. 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. Overall, we're really performing well in all areas of our business. Definitely win Civil and the National Security business. I think that's illustrated in the 11% margins that we're showing. I think as we get into fiscal year 2027 as a company, we'll see Civil declines impacting the margins. Then we'll be investing in some strategic, really R&D efforts that we're making in cyber and in defense tech. We're also seeing the cost reductions and improving execution and the favorable mix help margins.

There are some puts and takes to the margin as we look at it for fiscal year 2027. Overall, we're comfortable with where we stand on the margins front.

Got it. Thanks. If I could squeeze another one in on the defense side and budget dynamics. I think it was answered in a previous question that the guide doesn't necessarily assume a $1.5 trillion budget. It occurs to me that the base budget, even without reconciliation, would be really constructive for you guys. What are the sort of maybe watch items in reconciliation that could add to that? I guess framed another way, what key programs in 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. What drives most of our demand signal and the funding and the ramp-up is more driven by the certainty our customers feel about having the money there later in the year to perform the work. Obviously anything that happens in 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, our investment in some of the drone companies and technologies put us in a what I believe is a really good position as the Department ramps up those efforts.

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.

Got it. Thank you very much. Appreciate it.

Thank you. Our next question comes from David Strauss with Wells Fargo.

Thanks. Good morning. 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 is there still a potential for a sequential drop-off?

Yeah. 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. Overall, I think again first half should be challenged. 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, first half will be different than the second half. It'll look a lot different. Again, gaining momentum throughout the year is probably how I would tee it up at this point.

Yes. If I were to summarize 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, it means there's fewer new starts that overcome contracts ending. 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 got an increased pipeline. We've got more bids, an excellent recompete win rate. 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.

We're seeing some clear demand signals. Our AI-assisted software development is pretty incredible, so we expect demand for that to go up as well. It's really the crossover of where the declines were happening, nothing new, with the ramp-up of the net new. That's what causes the year to change.

Okay. Thank you. That's helpful. Maybe, Horacio, could you size space as well as health today and what's going on in those individual businesses? What did they grow at in 2026, and what you're thinking for those two businesses specifically for 2027? Thanks.

Oh, okay. It's actually very hard to put a specific number on any aspect of those businesses because as you know, part of what we believe in is in technology convergence. Even where some of our space business ends, where our intel business begins, we're doing cyber in space, we're doing AI in space, and trying to shred that too finely doesn't get us to where we need to be. I think we are optimistic about the growth in our space business writ large because of our position on AI and cyber in particular, because of the work we're doing on space domain awareness, because our position on Golden Dome, this is an area of investment for the administration, one which we believe is much needed. 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 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. 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. 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.

Thank you. Our next question comes from Noah Poponak with Goldman Sachs. Your line is open.

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. The funded bookings in the quarter are up year-over-year. That looks better. Hear everything you're saying. Can you just give us a little more detail on why things have changed? What is the customer telling you, and why things would be more stable? Just to try to better understand if it is a new trend versus not.

Yeah. It's a great question because you're right, it has been, we say choppy, but at times in a hurricane, and then looks 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 to 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. All of that really did slow down funding, I think as the new administration was aligning the spend to their priorities.

After the shutdown, we saw that go back, not to the levels that we saw in 2025, but we saw it go back to a more normalized environment. Although we are still seeing that there's incremental funding. They might fund you for a few months at a time and then come back and add funding again. I don't know that I would be the one to call 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've tried to incorporate. Certainly a better funding dynamic than FY 2025, but nowhere near our last fiscal year, FY 2026, but nowhere near what we would've seen historically.

Okay. That's really helpful. I appreciate that. I also wanted to ask about how you're managing headcount relative to revenue. I guess, if the revenue of a 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? Is it more that the mix of the business is mixing to less headcount-intensive? Is there any risk that you overdo it on the headcount 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 where 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. A lot of it was in Civil, as you know, and we worked through that. Later rounds were more oriented towards de-layering, towards 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. 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 similar margin structure this year to last year, even though 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. 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. 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. 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 it will.

I think the overall trend line is towards trying to get Civil stabilized 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.

Thank you. Our next question comes from Scott Mikus with Melius Research. Your line is open.

Good morning, Horacio, Kristine, and Troy. Your cash balance is equal to about 8% of your market cap, and your stock's 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? 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. You're also still seeing us, we will keep doing share repurchase. You see that in the share guide. 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. That gives us a lot of flexibility and optionality. We can do invest in the business and then also still looking to return cash to shareholders.

Okay. 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 2026 versus what we should see in the EBITDA bridge for fiscal 2027?

Booz Allen Hamilton Holding (BAH) Q4 2026 Earnings Call Transcript

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