Outlook holds rosy for Booz Allen amid market fits and starts

Booz Allen Hamilton knows and has cited the unknown factors to itself and the government market it operates in: the coronavirus pandemic, federal appropriations picture and November elections.

Company executives reminded investors of those factors on Friday in its first quarter earnings release and conference call, during which the firm also held to the full fiscal year financial outlook given in May. The plan remains to be more aggressive in the first half of Booz Allen’s fiscal year (April-September) with conservatism looming over the second half (October-March).

But as far as today goes, CEO Horacio Rozanski told analysts the firm is operating at “pre-pandemic levels essentially” thanks to collaborations and discussions with government clients on figuring out how to navigate the world with COVID-19. Eighty percent of Booz Allen’s billable work is happening remotely.

“In some pockets, things might be moving to the right a little bit, but by and large the demand environment continues to be very strong,” Rozanski said. “Clients are, if anything, even more focused on bringing technology to bear to tackle these issues.

“They have moved to telework just like we have, we’re talking about remote delivery for the long run, and this has also unearthed some needs in their networks, in their systems for cybersecurity, for cloud, for a number of things.”

Revenue for the first quarter climbed 7.2 percent year-over-year to $1.96 billion and the firm also posted a 7-percent increase on the bottom line to $213 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). Total backlog also rose 15.9 percent over the same period last year to $23 billion.

Work for some national security agencies remains disrupted due to those clients limiting on-site access to smaller groups of people at a time and many contractor employees moving to a shift-based schedule.

Much of the financial impact there centers around not being able to bill agencies the fee along with the cost, the latter of which can be reimbursed through the CARES Act if contractor employees are not able to get to the work site.

Back in May, Booz Allen’s expectation was that situation would result in $6 million per month of lost EBITDA. That turned out to be $12 million in lost EBITDA for the entire first quarter.

“In actuality, it’s a little bit less than that in large part because the clients have allowed for telework approvals,” Chief Financial Officer Lloyd Howell said. “We expect that will continue to evolve the longer we get into the year.”

How the fall federal appropriations process and then the elections right afterward impact the longer-term budget environment is much less certain, as are the possibility of fiscal pressures on spending. Both Rozanski and Howell understandably described their crystal balls as they relate to those factors as “cloudy.”

So if there is a defense spending downturn in future years, then will agencies go back to the playbook they followed during the early 2010s period of sequestration cuts?

 “Our clients started in the way that frankly many companies start with these discussions, which is cuts across the board and so forth, but very quickly move to prioritizing what was most needed, what was most important, and then cutting some things that were less important more deeply,” Rozanski said.

“I think that is now a skill set that’s in the muscle memory of especially the larger federal agencies that we serve, so I would expect that would be the approach.”

More specific to Booz Allen, one approach in its strategy came up more often during Friday’s call than in recent periods and that was to potentially make acquisitions. Booz Allen has spoken in the past of looking at 100 potential opportunities per year, but with an emphasis on capability-based tuck-in deals that can be integrated quickly.

That approach remains unchanged. What has changed is that the pricing and financing landscape for deals has become more volatile during the economic crisis brought by COVID-19.

“The pipeline is beginning to build nicely after some fits and starts at the beginning of the pandemic, and intend to scan things assertively,” Rozanski said. “We’re not going to deviate from the level of discipline we normally bring, but we are prepared to take advantage of the volatility in asset prices.”

They also feel differently about the due diligence function of exploring deals in a socially distanced world.

“I feel that if the opportunity presented itself, we would not pass or delay it because we are in the middle of a pandemic,” Rozanski said.