Booz Allen Cuts Costs, Sees Civil Turnaround as Pipeline Surges

Date of Call: Jan 23, 2026

Financials Results

• Revenue: $2.6B, down about 10% YOY (adjusted for shutdown impacts: down about 6% YOY)
• EPS: $1.63 per diluted share, up roughly 12% YOY; Adjusted EPS $1.77, up about 14% YOY
• Operating Margin: Adjusted EBITDA margin 10.9%

Guidance:

• Revenue expected between $11.3B and $11.4B.
• Adjusted EBITDA expected between $1.195B and $1.215B.
• ADEPS guidance raised to a range of $5.95 to $6.15 per share.
• Free cash flow expected between $825M and $900M.

Business Commentary:

Cost Reduction and Financial Performance:

• Booz Allen Hamilton executed a significant cost reduction program, cutting its run rate spend by approximately $150 million.
• Despite the protracted government shutdown, third quarter results were in line with revised fiscal year guidance, with adjusted EBITDA and ADEPS stronger than anticipated.
• The cost actions were necessary to enable agility in a changing market and create capacity for growth investments.

Transition to Outcome-Based Contracting:

• The company accelerated its transition to outcome-based contracting and product sales, successfully shifting a majority of existing task orders to fixed price components.
• This shift is expected to create cost savings for the government and support Booz Allen's margin expansion over the medium to long term.
• The transition aligns with customer demands and acquisition reforms, enhancing flexibility and innovation in delivery.

National Security and Growth Vectors:

• Booz Allen's national security portfolio, including Defense and Intelligence businesses, saw growth, with significant contract awards like a $99 million contract with the U.S. Navy.
• The company is positioned to benefit from increased demand in national security technology, particularly in areas like cyber, AI, and partnerships.
• Investments in growth vectors such as cyber and national security are aligned with administration priorities, driving expansion and future growth.

Civil Business Challenges and Pipeline Recovery:

• The civil business segment faced a 28% year-over-year decline, impacted by government funding delays and cuts.
• However, the qualified pipeline for the next fiscal year stands at nearly $53 billion, indicating a 12% increase compared to the previous year.
• The recovery is driven by a shift in focus towards modernization and transformation, particularly in AI and data platforms, signaling a potential turnaround in the civil sector.

Strategic Partnerships and Investments:

• Booz Allen announced a new partnership with Andreessen Horowitz (a16z), committing up to $400 million to a16z's late-stage venture fund.
• This partnership aims to co-create unique commercial tech for national security, public safety, and other government missions.
• The strategic investment is designed to leverage the tech ecosystem, driving innovation and delivering outcomes at speed and scale.

Sentiment Analysis:

Overall Tone: Positive

• Management expressed pride in navigating challenges and strong progress on priorities. CEO stated: 'Our performance this quarter and our progress against our 3 priorities gives me confidence that we are on track operationally and strategically.' They noted 'strong execution,' a 'record year-end backlog,' and are 'optimistic about the future.'

Q&A:

• Question from Colin Canfield (Cantor Fitzgerald): Concerns about end market expectations for FY '27, specifically if defense/intelligence is growing and civil is flat, and when downdrafts on civil will lift.
  Response: Management is cautiously optimistic, noting civil pipeline is up double digits and award activity is beginning to pick up, with growth expected in AI, cyber, defense tech, and commercial partnerships.

• Question from Colin Canfield (Cantor Fitzgerald): Inquiry about multiyear civil setup, specific pieces of past downdrafts, and multiyear opportunities post-cuts.
  Response: Civil has changed focus from cloud to data platform readiness for AI; delivery track record is driving renewed interest, with examples in AI-enabled public health, aviation safety, and border autonomy.

• Question from Gautam Khanna (TD Cowen): Asked about the cost reduction plan magnitude realized in the quarter and remaining impact.
  Response: Cost actions are done, with minimal impact in Q3, more in Q4, and full effect next fiscal year, resetting margin structure due to civil portfolio shifts.

• Question from Gautam Khanna (TD Cowen): Request for details on improved contract award pace and what is being pursued over next quarters.
  Response: Award activity picked up in December (funding >2x Oct/Nov combined) and January has been strong; pursuing work in AI, cyber, defense tech, and co-creating with partners, aligned with growth vectors.

• Question from Sheila Kahyaoglu (Jefferies): Asked about civil business shutdown impact and path to return to growth.
  Response: Civil has been a year of reset; award activity is just starting to turn, with pipeline expanding and on-contract growth beginning to show.

• Question from Sheila Kahyaoglu (Jefferies): Big picture question on biggest changes in selling to government.
  Response: Key changes are increased commercial partnerships (e.g., a16z) and shift to outcome-based contracting (e.g., Thunderdome to fixed price), enabling more tech leverage and margin expansion.

• Question from Scott Mikus (Melius Research): Whether organic revenue growth will outpace headcount growth going forward and offset civil pricing pressures.
  Response: Yes, business is being run more efficiently with tech leverage, leading to higher revenue and profit per employee, a trend expected to continue.

• Question from Scott Mikus (Melius Research): Follow-up on cash tax refund for FY '27 and potential impact from tax rate changes.
  Response: No increase expected; FY '27 has cash tax headwinds from $170M IRS refund, unwind of 174, state assessments, and partial conversion of R&D tax credit.

• Question from John Godyn (Citigroup): How company prepares for potential large defense budget increases, including investments or M&A.
  Response: Company is already leaning into priority areas (e.g., Golden Dome, space, cyber) and has built agility via cost reductions and flattened management to respond quickly to budget shifts.

• Question from Seth Seifman (JPMorgan): Expected funded backlog year-end and sufficiency for FY '27 growth.
  Response: Awards are accelerating with strong December/January funding; pipeline is up, and company is rightsized and positioned for growth, focusing on building momentum for next fiscal year.

• Question from Seth Seifman (JPMorgan): Areas of increased competition from new commercial players.
  Response: Competitive set has evolved; company leverages unique tech ecosystem partnerships (e.g., AWS, NVIDIA) to co-create solutions, viewing teaming as an advantage.

• Question from Jonathan Siegmann (Stifel): Clarification on on-contract growth recovery in civil and if still below trend.
  Response: Encouraging signs in funding and pipeline for on-contract growth, though environment remains choppy with smaller, more frequent funding requests.

• Question from Jonathan Siegmann (Stifel): Follow-up on Golden Dome and potential public updates on company's role.
  Response: Company is active in space opportunities aligned with Golden Dome but cannot discuss specifics; sees significant growth potential in this area.

• Question from Tobey Sommer (Truist): Interplay between potential large defense budget growth and fiscal restraint in civil.
  Response: Trend is focus on key national security priorities; civil missions remain enduring but approach changes, with company agile to reprogram funding shifts.

• Question from Tobey Sommer (Truist): Capital deployment strategy, including M&A and share repurchase constraints post-E.O.
  Response: Capital deployment priorities unchanged: strategic M&A in growth vectors, strong balance sheet as asset, dividend supported, share repurchases opportunistic.

Contradiction Point 1

Outlook for Civil Market Growth and On-Contract Growth

Contradiction on timing and signs of recovery in the civil sector, impacting financial expectations.

Are defense and intelligence expected to grow while civil remains flat in FY '27, and when do you anticipate the downdrafts in civil will lift? - Colin Canfield (Cantor Fitzgerald & Co.)

2026Q3: The business is beginning to show signs of an inflection point, especially in the civil sector where pipeline is up double digits and award activity is starting to pick up after a year of reset. - [Horacio Rozanski](CEO)

Assuming civilian guidance remains at ~-21%, what assumptions are made about the government shutdown and further program cuts, and what gives confidence this is the last guidance reduction for federal civilian business? - Colin Canfield (Cantor Fitzgerald & Co.)

2026Q2: The environment remains very slow with few new bids and minimal funding ramp-up. While productive conversations are happening... it's difficult to predict when new work will launch. - [Kristine Anderson](COO)

Contradiction Point 2

Expectations for National Security/Award Activity Ramp

Contradiction on the expected pace of ramp-up for recent defense/intel wins, affecting revenue visibility.

Can you elaborate on the pace of contract award activity? - Gautam Khanna (TD Cowen)

2026Q3: Seeing signs of demand pickup in civil and strong demand in national security growth areas. - [Horacio Rozanski](CEO)

Are you seeing signs that the funding environment for defense and intel is improving and returning to normal, or is it expected to remain strained even after the government restarts? - Louie DiPalma (William Blair & Company L.L.C.)

2026Q2: The company is not anticipating a fast ramp-up on recent defense/intel wins; they will ramp but more slowly than historical levels. - [Horacio Rozanski](CEO)

Contradiction Point 3

Outlook for Civil Market Recovery

Contradictory signals on the timing and certainty of a return to growth in the civil sector, affecting strategic outlook.

Are defense and intelligence expected to grow while civil remains flat in FY '27, and when do you anticipate the civil downdrafts to subside? - Colin Canfield (Cantor Fitzgerald & Co.)

2026Q3: The business is beginning to show signs of an inflection point, especially in the civil sector where pipeline is up double digits and award activity is starting to pick up after a year of reset. Cautiously optimistic about growth in AI, cyber, defense tech, and commercial partnerships. - [Horacio Rozanski](CEO)

What is the remaining headwind for civilian revenue, and how quickly can you hire and deploy cleared technical talent? - Mariana Perez Mora (BofA Securities)

2026Q1: The civilian business is now stable after the Q1 reset; the company is confident and preparing to return to growth in the medium term. - [Kristine Anderson](COO)

Contradiction Point 4

Impact of Cost Reduction Plan on Margins

Contradiction on the timing of realizing benefits from cost-cutting actions, impacting financial performance expectations.

Can you discuss the cost reduction plan, what remains, and what was realized in the quarter? - Gautam Khanna (TD Cowen, Research Division)

2026Q3: Cost reduction actions are complete for Q3. The full impact will be felt in the next fiscal year, resetting the margin structure to accommodate portfolio shifts. Some impact visible in Q4, none in Q3. - [Matthew Calderone](CFO)

How have funded backlog trends evolved, and what are the implications of recent declines? - Gautam J. Khanna (TD Cowen)

2026Q1: The decline in funded backlog is consistent with strong bookings but slow conversion in the current funding environment; it's an industry-wide issue, not a concern, but hinges on funding normalization. - [Matthew Calderone](CFO)