Booz Allen Hamilton Holding Executive Insights: Demand Outlook, Market Growth Detail

On Wednesday, Booz Allen Hamilton Holding Corp (NYSE:BAH) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Demand Outlook

Nathan Rozof – Morgan Stanley: I wanted to start off with just Ralph some thoughts from you on the overall demand outlook. I mean book-to-bill was obviously strong, total backlog for – the funded backlog was up which is a good sign. So as we think through the puts and takes in terms of the potential for sequestration or continuing resolution looming at the end of this year, the early next year offset by a lot of investment you guys have been making in international as well as the seven key growth areas that you just identified, how should we think about the kind of current trajectory of backlog in demand as we move through fiscal ’13.

Dr. Ralph W. Shrader – Chairman, CEO, and President: Well, Nate, my crystal ball is maybe no better than yours. I think there is an awful lot of uncertainty out there that we’re all expecting. We’re in the middle of an election year, a lot of politics going on. We have some un-pending, shall we say chaos near the end of the calendar year as our confluence of events certainly conspires there to create some challenges about what the way ahead looks like. Having said that, I think our strategy has been to be prepared, to be ready, to be agile and that’s the reason we took the restructuring that we took at the beginning of the year to put our organization in the right kind of financial shape and whatever, and that’s why we’ve been investing in year as we’ve been investing in and that’s also why our continued focus has been on really the core mission of our clients. While we can’t predict with any certainty exactly what the budget situation is going to be, whether sequestration will occur or not occur, we know that there are a lot of essential functions that are still going to have to be performed by our federal government clients. We want to be in the center of that. We want to be providing the most essential services in the most high-quality fashion that can be provided and therefore be very relevant to whatever work is going on. So for that reason we have a lot of confidence in how we’ve invested in cyber and cloud, in the markets that we’ve invested in that there is going to be still continued demand out there for Booz Allen services, even in turbulent times. As to your reference about commercial and international, these same capabilities are very relevant there. Financial services, healthcare, the kind of things that we’re doing in cyber, the kind of things we’re doing in cloud, all show increasing demand out there in the marketplace. The work that we’re doing in the Middle East has been very I think productive for us and also shows every indication that there’s continued and there is further demand out there that we’re now reaching out to serve by expanding our presence in that geography. So, all of this says that while we are certainly prepared and know how to manage their business in a very agile fashion, we have some confidence out there that there are going to be continued opportunities for a firm of our caliber and our quality, doing the kind of things we do and the way we do them. So, I think our expectation is that we will continue to be a key player in this marketplace even in very challenging times.

Nathan Rozof – Morgan Stanley: Thanks, Ralph. Then Sam I wanted to just turn to you for my follow-up. As we think through return of cash to shareholders, you guys have now employed several different strategies with the buyback authorization, the regular dividend, and the one-time dividend announced, not today. How do you see the return of cash strategy evolving over time?

Samuel R. Strickland – EVP, CFO and CAO: Essentially, it will be a continuation of the strategy we followed, which is that we will look at all of our options. We will continue to think in terms of debt repayment, additional dividends, even acquisitions. I think it’s anybody who is following the industry is aware that there is accounting consolidation. We certainly will look there to see if there are some strategic fits. Generally, as you know, we have not been acquisitive in the past, (but) would need to be something special, but clearly we’ll continue to take a look at that. So in essence, the continuation of the policy that we have followed, which we believe is both conservative and in the best interest of the shareholders.

Nathan Rozof – Morgan Stanley: Then just given that you haven’t bought back shares on the buyback authorization, should we take that as an indication that there is a general preference for dividends over buybacks and I’ll follow-up there, thank you.

Samuel R. Strickland – EVP, CFO and CAO: Well, as they say, action speak louder than words, so I think, certainly is – today that’s been the case. We’ll continue to evaluate that. That comes down to – there was a special committee of the Board set up to look at those issues. So, we will continue to evaluate that option.

Market Growth Detail

Carter Copeland – Barclays Capital: A couple of quick questions. First, I wondered if you might speak to the growth in the quarter and maybe for the full year, and I wondered if you might be – you said that you saw growth in all major markets. I wondered if you might give us a little color around what you’re seeing in each one of those relative to the other and perhaps quantify or at least speak to the success you are having in commercial and international, as a kind of first question.

Horacio D. Rozanski – EVP and COO: Carter, it’s Horacio. I think you almost answered the question, which is, we did see good growth across all the markets. The intelligence market continues to be strong. In the civil markets some areas of health and financial services were particularly bright stars. Across defense, we saw both growth and a transition of the portfolio towards more of the C4ISR type of activities, which as Ralph mentioned, are core to our clients’ missions and area where we think we can excel and continue to find opportunities. Commercial/international are both – I think Ralph spoke to them. There’s not much to add. We see demand from the kinds of clients that we would like to have in our portfolio in terms of their (import) to their industries, especially in financial services and healthcare. In the energy area, we focused a lot of our efforts in the utilities market and we expect the growth there to continue, but still we would character it is early days and it’s still, and therefore in its incubation stage, but there is – the early returns are sort of what we expected to see and we feel like we are on plan. There same holds true for international; the work that we’re doing is consistent with the capabilities that we thought we were going to be able to bring to bear, especially around cyber and we’re building not just the footprint, but the relationships and then ultimately reestablishing a brand that we’ve had in that region for quite some time. So we feel good about international as well.

Carter Copeland – Barclays Capital: So just to clarify and please correct me if I’m wrong, it sounds like civil and intel are growing a bit faster than defense market as we, I think, would expect. The commercial and international efforts although growing are off of a very small base and are not significant to the totals for the entire enterprise. Please correct me if I’m wrong.

Samuel R. Strickland – EVP, CFO and CAO: Carter, this is Sam. Let me just jump in, and I think in the past we talked in terms of commercial and international being less than 2% of the total. We said that we provide more details on that once it did become significant. It did break through the 2% barrier slightly and it is growing in double digits. We continue to invest heavily, but I think it’s still given that magnitude it’s little early to start breaking that out and talking about that separately.

Carter Copeland – Barclays Capital: No, that’s great, the color is helpful. I wanted to talk a little bit about – I wanted you to talk a little bit about process and planning as we get closer to what will be your third and fourth quarter around sequestration. We’ve dealt with elections before and we’ve dealt with continuing resolutions before but the magnitude of the challenges, it looks like we’re headed toward our sort of unique in there – potential severity and so when you look at things like resource planning, headcount, those sorts of things, how more specifically are you planning on these sorts of things for the back half of the year in terms of hiring and the like?

Samuel R. Strickland – EVP, CFO and CAO: Well, I can tell you at this point, it seems like the best we could do would be to guess what’s going to happen. So the thing about these businesses just like Booz Allen is to keep your cost as variable as possible, as you know we started reducing our facilities’ footprint some time ago trying to ensure that our costs – we minimized our fixed costs. So from our standpoint, we feel like we trimmed our cost profile last February when we announced that restructuring. We believe that will carry us through whatever turbulence we’re going to see. But I think it’s up to firms like ours to aggressively manage your cost base in response to what is happening in the market, and certainly we will continue to do that.

Carter Copeland – Barclays Capital: I know in the past we’ve looked at headcount as a good leading indicator of where the business maybe, but as you progress into this environment, does that usefulness go down as you hold that headcount tighter because of the uncertainty in trying to keep your costs more variable?

Samuel R. Strickland – EVP, CFO and CAO: I think that’s a fair assessment. You know in the past as we’ve gone into the (some of the) bid and proposal season we would add headcount to be prepared to both support the work while the existing staff turn to marketing in bid and proposal and also to be prepared to the new work that’s normally comes in by the end of government’s fiscal year. I think this year we’ll clearly take a more conservative approach until we see what’s going to shake up around all of the, let’s call it political turmoil that we’re looking at.

Horacio D. Rozanski – EVP and COO: Before that question, I don’t know if you saw in today’s journal there is some article. I think it’s in the marketplace section where they talk about companies that are doing more hiring from within. Over the last couple of years we’ve been building and actually we’re quoted in that article, we’ve been building a capability to deploy more effectively from within, we call it insight first and the – we’ve gone from 10% of our hiring ‘being from within to north of 30%’ as the article point out. So we have greater capability to deploy resources across (metrics) to the places where we can grow. So we’re using capacity more effectively than when we ever had in the past.