Booz Allen’s Q2 2026: Contradictions Emerge on Funding, Backlog, Civil Business Stability, and Growth Priorities

Date of Call: None provided

Financials Results

• Revenue: $2.9B, down 8% YOY (≈-9% ex-billable; -5% YoY adjusting for prior-year discrete provision)
• EPS: $1.42 per diluted share, down 53% YOY; adjusted diluted EPS $1.49, down 18% YOY
• Operating Margin: Adjusted EBITDA margin 11.2%, down 40 basis points YOY; H1 adjusted EBITDA margin 10.9%

Guidance:

• FY26 revenue expected $11.3B–$11.5B
• Adjusted EBITDA margin expected in the mid-10% range (adjusted EBITDA $1.19B–$1.22B)
• Adjusted diluted EPS expected $5.45–$5.65
• Free cash flow expected $850M–$950M
• Guidance assumes current funding/procurement trends persist and includes ~$30M revenue / ~$15M profit impact at midpoint if shutdown through Oct 31
• Company pursuing $150M annualized cost reductions while investing in cyber, AI, warfighting tech and outcome-based solutions

Business Commentary:

* Revenue and Market Conditions: - Booz Allen Hamilton reported revenue of $2.9 billion for the second quarter, an 8% decline over the prior year period. - The decline was primarily due to a challenging civil business environment, where the company faced run-rate cuts in their large technology contracts, leading to a 22% year-over-year decline in civil business revenue. - National security, however, showed growth with the portfolio up 5% year-over-year, driven by significant wins like the $1.2 billion Shadow Raptor task order and other notable awards.

• Cost Management and Strategic Adjustments:
• Booz Allen Hamilton is taking significant cost reduction measures, targeting a net incremental cost reduction of $150 million annually.

• The company decided to accelerate the use of AI in internal operations and simplify its operating model to enhance decision-making and investment capabilities.

• Technology and Capabilities Strength:

• Booz Allen's cyber business continues to grow, with products like ThunderDome becoming standards in zero-trust environments.

• The company's leading positions in AI, cyber, and warfighting technology are driving growth, particularly in the national security portfolio, which accounts for 90% of gross bookings.

• Funding and Procurement Environment:

• The company experienced a 6% year-over-year decline in funded backlog due to slower contract funding and delays in new contract awards.
• Funding levels were slower than in prior years, with September funding consistent with the prior year but at a slower pace than historical trends.

Sentiment Analysis:

Overall Tone: Neutral

• Management lowered FY26 guidance and said re-acceleration will take longer due to civil procurement friction, yet highlighted strong national-security wins ($7.2B bookings, ~90% national security) and emphasized medium-term optimism driven by cyber, AI, tech partnerships and a $150M cost-reduction program.

Q&A:

• Question from Michael Louie D DiPalma (William Blair): Are you receiving signs that funding for defense and intel is improving and will it remain strained after the government restarts?
  Response: National security funding is stronger than civil and awards are encouraging, but friction remains—expect slower-than-historical ramp-ups and continued short-term funding episodicity (shutdown/CR risk).

• Question from Michael Louie D DiPalma (William Blair): For the rest of the year, does the civil guidance (~-21%) assume further cuts or throttled programs and what gives confidence this is the last guidance reduction for civil?
  Response: Guidance assumes civil has stabilized with no additional cuts baked in; we expect low‑20% decline for FY26 driven by muted procurements and pricing pressure, timing of recovery uncertain.

• Question from Sheila Karin Kahyaoglu (Jefferies LLC): Is it reasonable to think civil margins ~13% and defense/intel ~8–10%, and how will you align salesforce/workforce over the longer term?
  Response: Civil is roughly higher margin due to fixed-price work; longer term we’ll operate a single P&L, flow resources to growth vectors, and lean into tech partnerships and outcome-based models rather than reverting to prior structures.

• Question from Colin Michael Canfield (Cantor Fitzgerald & Co.): Given civil down and defense mid-single-digit growth, can you grow in 2027 and when will the company return to growth?
  Response: We won’t commit to a specific 2027 growth rate—national security momentum and easier comps support medium-term growth, but timing is uncertain and growth will depend on slower ramp rates and mix shifts.

• Question from Mariana Perez Mora (BofA Securities): How much of the guidance is covered by backlog and how strong is the pipeline versus a year ago?
  Response: Total backlog $40B (up 3% YOY) with funded backlog ≈$5B (down 6% YOY); qualified pipeline ≈$25B, roughly in line with prior years—guidance assumes current burn rates and trends largely persist without needing material new wins.

• Question from Gavin Parsons (UBS): Is total backlog still a good leading indicator of demand and growth given the disconnect between awards and funding?
  Response: Backlog matters long term, but funded backlog and funding cadence matter more short term; funding improved sequentially but has not normalized, causing more episodic ramps.

• Question from Toby Sommer (Truist): How do you decide how much growth investment to allocate vs near-term profitability and headcount cuts?
  Response: We’re taking net $150M of annualized cost out to free capacity for prioritized investments in cyber, AI and warfighting tech—balancing near-term profitability with medium/long-term growth opportunities.

Contradiction Point 1

Funding and Market Conditions

It involves differing perspectives on the funding environment and market conditions, which are crucial for understanding the company's growth trajectory and financial forecasts.

Are you seeing signs that the funding environment for the defense and intel business is improving, and will it be strained after the government reopens following the shutdown? - Michael Louie D DiPalma(William Blair)

2026Q2: The civil business is in the most challenging market in a generation, with every procurement sliding to the right. In contrast, our national security business, though still facing friction, is stronger. - Horacio Rozanski(CEO)

Given your recent contract wins under the new administration, is there greater appreciation for your technologies and has the procurement environment improved compared to 3 months ago? - Michael Louie D DiPalma(William Blair & Company L.L.C.)

2026Q1: I think it is fair to say that the business has stabilized in a dynamic environment. Tech holds out well, impacting missions positively. We're accelerating transformation and positioning for upside. - Horacio D. Rozanski(CEO)

Contradiction Point 2

Backlog and Growth Expectations

It involves differing expectations regarding backlog coverage and growth potential, which are critical for understanding the company's future performance and strategic planning.

Is total backlog still a reliable leading indicator of demand and growth? - Gavin Parsons(UBS)

2026Q2: While total backlog matters long-term, short-term funded backlog is critical. Funding has not normalized, and we expect slower ramp-ups on new wins. - Horacio Rozanski(CEO)

Can you comment on the funded backlog trend and expected catch-up? - Gautam J. Khanna(TD Cowen)

2026Q1: The funded backlog trend is consistent with winning work and positive demand signals. Funding is moving slowly, but we're confident in the medium term. - Matthew A. Calderone(CFO)

Contradiction Point 3

Civil Business Stability and Hiring Challenges

It involves differing perspectives on the stability of the civil business and hiring challenges, which are crucial for understanding the company's operational capabilities and workforce management.

Will the business grow next year? If not, when do you expect growth to resume? - Colin Michael Canfield(Cantor Fitzgerald & Co)

2026Q2: We have momentum in our national security portfolio and stability in civil. - Horacio Rozanski(CEO)

What remaining headwinds are there for civilian work, and what hiring challenges exist? - Mariana Perez Mora(BofA Securities)

2026Q1: Civil work is stable with excellent work in AI and public safety. We're confident moving forward and expect to return to growth in Civil. - Kristine Martin Anderson(COO)

Contradiction Point 4

Market Conditions and Revenue Growth Expectations

It involves differing perspectives on the market conditions and revenue growth expectations, which are crucial for investor confidence and strategic planning.

Are there signs that the funding environment for the defense and intel business is improving and expected to tighten after the government resumes operations post-shutdown? - Michael Louie D DiPalma(William Blair)

2026Q2: The civil business is in the most challenging market in a generation, with every procurement sliding to the right. In contrast, our national security business, though still facing friction, is stronger. - Horacio Rozanski(CEO)

How confident are you that you've fully assessed the impact of unpredictable de-scoping and cancellations, and that there won't be additional impacts this year? - Gavin Parsons(UBS)

2025Q4: Booz Allen sees two sets of overlapping dynamics: a reset in civil business due to spending and procurement slowdowns, and continued strength in defense and intel. The reset is expected to be one-time, with civil business already reviewed positively. Booz Allen is positioned to grow, absorb market dynamics, and align with national priorities. - Horacio Rozanski(CEO)

Contradiction Point 5

Investment in Growth and Cost Management

It highlights differing approaches to cost management and investment in growth, which are key for sustaining competitive advantage.

Will the company grow next year? If not, when do you expect growth to resume? - Colin Michael Canfield(Cantor Fitzgerald & Co)

2026Q2: We can't be everything to everyone and have to increasingly focus on our core strengths of national security, particularly in cyber and AI. - Horacio Rozanski(CEO)

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2025Q4: We are investing for future growth, and we don't think that now is the time to pull back on that. - Horacio Rozanski(CEO)