Booz Allen Hamilton Q3 FY2026 Earnings Call - Cost Cuts and Tech-First Pivot Offset Shutdown, Setting Stage for Margin Re-acceleration

Matt Calderone, Executive Vice President and Chief Financial Officer, Booz Allen Hamilton: Good morning, and thank you for standing by. Welcome to Booz Allen Hamilton’s earnings call covering third-quarter fiscal year 2026 results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. I’d like to turn the call over to the head of investor relations, Dustin Darensbourg.

Dustin Darensbourg, Head of Investor Relations, Booz Allen Hamilton: 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 two. 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 in the disclaimer on slide three, 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 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 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 four.

Horacio Rozanski, Chairman, Chief Executive Officer, and President, Booz Allen Hamilton: 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 1st, and today is his final Booz Allen earnings call. Matt has been with the company for over 23 years and has had a 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. As we continue our search for a new CFO, Kristine Martin Anderson will serve as our interim CFO 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. 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 three priorities we would focus on to strengthen our near-term financial performance, expand our market leadership, and re-accelerate 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 proving 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 three 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 government 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 ensured our people could immediately return to their customers’ missions when contracts restarted. Overall, our results this quarter show 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 Innovation System, or ERIS 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 zero-trust 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 Defense. 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 of the primary threats of 2026, this product is a force multiplier for cyber defense efforts. Thus, Booz Allen is redefining 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 number three, focusing investments by doubling down on proving 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. Two 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 onboard ships around the world. Using low Earth orbit satellites, advanced Wi-Fi, 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 littoral 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 Andreessen Horowitz, 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, healthcare, 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. It’s 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 three 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 five 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. 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 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 31st, our qualified pipeline for 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 for more qualified technical work on 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 two 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 push 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 was 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 Q3. 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, and 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 0.3 times and a trailing 12-month book-to-bill of 1.1 times. 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 worked 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 headcount 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 three 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 pre-tax gain from the divestiture of our DARPA’s Cedar work, which is excluded from our non-GAAP adjusted income and 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 million, 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 purchases 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 Booz Allen 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 2nd to stockholders of record as of February 13th. 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 am 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 seven. We remain focused on execution in the remaining months of a dynamic year. We expect quarter four funding to improve over quarter three, but remain 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-$6.15 per share. Lastly, we expect to generate free cash flow between $825 million and $900 million.

We enter 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 Velox Reverser. We completed a major design review on the Air Force’s Tactical Operations Center-Lite program, the Air Force’s next-generation mobile command and control system. We launched America the Beautiful passes on Recreation.gov.

We engaged our allies on Zero Trust and Warfighter tech solutions, and we co-developed 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. Thank you so much. As a reminder to ask a question, simply press star 11 to get in the queue. To remove yourself, press star 11 again. One moment for our first question, please. It’s from Colin Canfield with Cantor. Please proceed. Hey, thank you for the question. Matt, thank you for your leadership. Character is the long-run determinant of many nations alike. Honestly, it’s something you’ve exhibited in spades from your 2022 starting point, a Russian invasion of Ukraine, to this year’s volatility. Certainly want to thank you.

And then switching over to maybe the question side of it, as we think about the end market expectations for FY27, is it fair to characterize defense and intelligence as growing with civil flat? And then essentially, when do you expect the downdrafts to lift on civil in FY27? Thank you. Hey, Colin. Good morning. 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 re-accelerating 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. We’re beginning to see some movement on the work 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. 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. This work that we’re doing with commercial partnerships is also going to bring another wave of opportunity. Got it. No, I appreciate the call.

And then in terms of the kind of multi-year civil setup, can you maybe kind of talk to, as we think of the pieces that have been downdrafts this year that are likely to get made up over a multi-year period, maybe just frame kind of that construct versus the concept of just a high-level rebuilding the civil administration and maybe how you think about the multi-year level of work, not just the quantitative makeup from this year, but essentially the level of cuts that have gone through civil this year. Conceptually, how do you think about that as being an opportunity for Booz Allen Hamilton over a multi-year period? Yeah, thanks, Colin. 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 AI. 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, healthcare will always be a national priority. And we are seeing green shoots in AI-enabled public health, bio-threat 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/ML for multi-source intelligence, integrating commercial sources. There’s just a few examples. Okay. No, I appreciate it.

Thank you. Thank you so much. One moment for our next question. That comes from Gautam Khanna with TD Cowen. Please proceed. Yes, thank you. And congratulations on that. 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 it, but how much was realized in the quarter? Yeah, 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 that sort of cost recoverable environment, there’s 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.

To go back to Colin’s question, we obviously took a shock on our civil 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 one-time actions in civil. We saw very little of it in Q3. You see maybe a little bit more of it in Q4, the full weight next fiscal year. Gotcha. 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?

Maybe, I don’t know if you’re comfortable sharing, 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, but what are you actually pursuing in the next couple of quarters? We are seeing more movement in December post the shutdown. Funding in December was more than twice what October and November were combined. 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. Yeah, because the other thing I would say is, as you know, we have plenty of contracts healing. And so we’re looking for early signs, and we’re beginning to see signs, but it’s early of demand picking up. And as Kristine pointed out, demand in civil is picking up. And demand against our key defense growth areas and national security growth areas remains strong. Thank you. Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed. Hi. Good morning, guys. And 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, 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? Yeah, I think the civil business overall had, this has been a year of a 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. Thank you so much. 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 one or two 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. Yeah. 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 of which had nothing to do with this topic that was in the A16Z portfolio. And we see more of that in the future, and we see ourselves as advantaged 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 Defense, from Counter-UAS to integrated C2 to battle management. And so to me, that is one 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 there are moving to fixed-price. 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. Great. Thank you so much. Sure. Thank you. Our next question comes from Scott Mikus with Melius Research. Please proceed. Good morning, Horacio and Matt. Nice results. And good job on the cost data. Your headcount was down 12% year-over-year. Just as the business returns to growth and you leverage AI-based solutions, should we expect organic revenue growth to outpace headcount 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? Yeah, 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, we’re 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 one other modeling question. Previously, you had mentioned you expected a $170 million cash tax refund in fiscal 2027. Does 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 there are still three cash tax headwinds for next year. There’s the continued unwind of 174 and state’s ongoing assessment of the one big beautiful bill. There’s what you just mentioned, the $170 million refund from the IRS. And then 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. Okay. Got it. Thank you. Thank you. One moment, please, for our next question. It comes from the line of John Goddin with Citi. Please proceed. Hey, guys. Thanks for taking my question. 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. 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"? 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’s messaging the possibility of that kind of growth, how does that kind of feed into the strategic thinking? 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. The president has been clear all along about rebuilding the defense industrial base around recapitalizing some aspects of it, around bringing new technology to bear for our war fighters in the battlefield. I think a larger budget, whatever the number ends up being, is consistent with the messaging that’s been going on all along. 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 year. As one 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 cyber attacks and the first publicized one was when Anthropic had the courage of coming in and explaining how Claude 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 AI 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, excuse me, against these key priorities: cyber, AI, national security, especially related to space and the border, defense technology, right?

I mean, and all of these commercial partners, 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. 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. 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. Yeah. Okay. Thanks a lot. Thank you. Our next question comes from the line of Seth Seifman with JPMorgan. Please proceed. Hey, thanks very much and good morning. And congratulations, Matt. I wanted to ask, when we think about the funded backlog and recognizing that the award situation depressed Q3, where do you think you can end the year on funded backlog? And will that be enough to allow for growth in fiscal 2027? Yeah. Thank you. As I mentioned, we are starting to see awards accelerate. 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.

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, pipelines up, lots of proposals being worked at all moments here, and also even unsolicited proposals, OTAs, CSOs. It’s very active. We’ve got ourselves right-sized and ready and positioned for growth. Okay. Okay. Okay. Great. Thanks. Then maybe as a follow-up, in your filings, you guys have pointed out the 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 five years ago and even primary teammates five years ago and the people that we team with now, it’s a different competitive set. For us, we look at this 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 one 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 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 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. Great. Great. Thanks very much. Sure. Thank you so much. Our next question comes from the line of Jonathan Siegmann with Stifel. Please proceed. Good morning. Thank you for taking my question. And good luck, Matt. Just in the past, you’ve highlighted tactical selling and on-contract growth as one of the challenges of this dynamic environment.

Kristine, you had some encouraging comments about seeing a recovery in civil. I just wanted to clarify whether this has normalized for the entire portfolio or is it still below trend and expecting there’ll still be a challenge next year. Thank you. Sure. On-contract growth will always be important. It’s really just a matter of matching the customer’s needs with solutions that we can bring forward to them. There’s always a constant selling that’s going on. As we mentioned, the funding environment has been choppy, right? Does two months make a trend? I hope so. But we’re going to see here over time. There is a trend toward just funding smaller amounts more frequently, and that’s a lot more activity for a lessened 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. Thank you. And then if I can slip in another one about a 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? Thank you again. Yeah. 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.

We expect and hope to see significant growth there. And again, I mean, I’ll take it back to something Kristine said. 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. Thank you. Thank you so much. And our last question will come from Tobey Sommer with Truist. Please proceed. Thank you. And 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 in 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 Defense, they’ve done a lot of work reprogramming to make sure that they’re focusing funding against the key priorities. The One Big Beautiful Bill 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 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’ve built more agility into our system. Again, I point you to the cost reduction. I point you to the fact that we’ve flattened and simplified 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’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 and aviation safety. You still need to deliver healthcare. 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. Thank you. 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? Yeah. Let me start with the EO. The EO was focused on making sure that the defense contractors, especially the ones that the Department of Defense warfighters are underperforming, got back on track and made sure that they invested consistently with the requirements in order to create the capacity and to prioritize the government’s missions. I think Booz Allen is already there. In addition to the fact that our work is much 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 and on the main, 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. The balance sheet is strong, and it’s a strategic asset. 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 we’ve been talking about all morning. Then so hopefully, you’ll see us be more active, especially in those areas. Beyond that, of course, we’ll continue to support the dividend. 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 reaccelerating, reigniting our growth and to do it in a very focused way. Thank you. Thank you so much. And this will conclude our Q&A session. I will pass it back to Horacio for closing comments. Thank you, Carmen. And thank you all for your questions this morning. I hope the discussion conveyed 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 amping 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. Concludes our program. Thank you for participating, and you may now disconnect.