Booz Allen's Q2 2026 Earnings Call: Contradictions Surface on Funding Environment, Fixed-Price Contracts, and Civil Business Stability

Date of Call: October 24, 2025

Financials Results

• Revenue: $2.9B for Q2, down 8% YOY (≈9% decline on a revenue ex-billable basis)
• EPS: $1.42 diluted EPS, down 53% YOY; adjusted diluted EPS $1.49, down 18% YOY
• Operating Margin: Adjusted EBITDA margin 11.2%, down 40 basis points YOY

Guidance:

• Revenue expected $11.3B–$11.5B for FY'26
• Adjusted EBITDA expected in the mid-10% range (~$1.19B–$1.22B)
• Adjusted diluted EPS expected $5.45–$5.65
• Free cash flow expected $850M–$950M
• Guidance assumes ~$30M revenue and ~$15M profit impact from the government shutdown through Oct 31 (similar impact if shutdown extends to November)
• Assumes current funding/procurement trends persist through fiscal year-end

Business Commentary:

• Business Performance and Market Dynamics:
• Booz Allen Hamilton reported gross revenue of $2.9 billion for Q2 FY2026, a 9% decline year-over-year.

• This was due to significant procurement delays and slow funding increments in the civil sector, despite a strong national security portfolio.

• National Security Portfolio Growth:

• Booz Allen achieved $7.2 billion in gross bookings in Q2, with 90% in the national security portfolio, including notable awards like the $1.2 billion Shadow Raptor task order.

• Growth in this sector was driven by strong demand in defense and intelligence sectors, with a focus on AI, cyber, and warfighting technology.

• Civil Business Challenges:

• Civil business revenue declined by 22% year-over-year in Q2.

• This downturn is attributed to a challenging market environment, lack of major procurement actions, and slower contract funding.

• Cost Reduction and Strategic Focus:

• Booz Allen plans to take $150 million in net annualized costs out of the business, primarily through AI-driven internal operations and workforce reductions.
• This action is part of a broader strategy to focus resources on growth vectors in national security and critical technology sectors.

Sentiment Analysis:

Overall Tone: Negative

• Management said the "reacceleration of our business will take longer" and that they are "lowering top and bottom line guidance." Horacio stated, "I am disappointed in our results this quarter and that we are lowering guidance across all key metrics," and CFO outlined cost actions to offset weakness.

Q&A:

• Question from Louie Dipalma (William Blair): Are you seeing signs that funding for defense and intel is improving back to normal, or will that funding environment remain strained after the government restarts?
  Response: National security demand is stronger and award activity is encouraging, but funding/friction remains (slower ramp-ups and CR/shutdown effects); growth will happen but ramp rates will be below historical levels.

• Question from Louie Dipalma (William Blair): In your civil guidance (down ~21%), what assumptions are baked in about the shutdown or further cuts to existing programs — are you assuming throttled programs or further reductions?
  Response: Civil is assumed stabilized with no additional cuts baked in, but a highly competitive procurement environment and pricing pressure on large recompetes lead to the low-20% revenue decline assumption.

• Question from Louie Dipalma (William Blair): Was there stabilization in the civil business in the September quarter relative to June?
  Response: Yes — civil has been steady since earlier reductions: no new decrements but continued low activity and slower tactical selling.

• Question from Sheila Kahyaoglu (Jefferies): Previously you referenced civil margins ~13% implying defense/intel margins ~8%–10% — is that still the right profitability profile to think about?
  Response: Yes — civil remains relatively higher-margin driven by fixed-price work (roughly mid-teens), and defense/intel are lower (roughly 8%–10%), consistent with past dynamics.

• Question from Sheila Kahyaoglu (Jefferies): How do you align salesforce, workforce and management as market pendulums shift so you can flex between civil and national security over time?
  Response: Operate a single P&L to flex resources quickly toward growth vectors; double down on tech partnerships and the secular transition to outcome-based/commercial tech delivery.

• Question from Colin Canfield (Cantor Fitzgerald): If civil declines further (e.g., -10%) and defense/intel accelerates to mid-single digits, does that imply roughly 0%–2% organic for '27 — can you grow next year and when do you expect a return to growth?
  Response: They declined to provide specific '27 guidance; core message is national security momentum and easier comps can drive improvement, but timing is uncertain — medium-term optimism remains.

• Question from Colin Canfield (Cantor Fitzgerald): From an investor perspective, why would shorting into the next quarter be a bad idea?
  Response: Management declined to offer investment advice.

• Question from Mariana Perez Mora (BofA): On the new guidance, how much is already in backlog vs. dependent on new wins or delayed contracts; how strong is backlog coverage and how does the pipeline compare to a year ago?
  Response: Guidance largely assumes current burn rates and funding trends persist and does not require material new wins; total backlog remains ~$40B and qualified pipeline (~$25B) is roughly in line with prior years.

• Question from Mariana Perez Mora (BofA): How certain are customers about on-contract growth — are your conversations indicating that growth will materialize or is there still significant uncertainty?
  Response: Conversations are productive, especially in national security and priority growth areas (e.g., cyber), but management did not assume rapid back-half ramp and recognizes ongoing friction/uncertainty.

• Question from Mariana Perez Mora (BofA): How large is the cyber portfolio today and what do you expect for it over the next 2–3 years?
  Response: Management is very bullish: cyber is a major growth vector with strong demand across government and commercial driven by AI convergence and increasing attack/defense needs.

• Question from Gavin Parsons (UBS): Given the disconnect between awards and funding, is total backlog still a good leading indicator of demand and growth?
  Response: Long-term backlog remains a leading indicator, but funded backlog and funding cadence matter short-term; funding improved sequentially (Q1 -9% YOY to Q2 -3% YOY) yet has not normalized.

• Question from Tobey Sommer (Truist): How do you decide growth investment allocation while cutting costs and headcount — how did you arrive at these trade-offs?
  Response: They prioritize medium/long-term growth: implementing $150M of annualized cost reductions to create capacity to invest in priority growth vectors while protecting near-term financials.

• Question from Tobey Sommer (Truist): With civil TAM changes, do you assume civil margins will hold despite potential margin compression from increased competition?
  Response: Expect some pricing pressure from fewer bids and more intense competition, but believe delivery innovation and greater use of technology can help preserve margins.

Contradiction Point 1

Funding Environment and Future Growth Expectations

It involves differing perspectives on the funding environment and future growth expectations, which are crucial for investor assessments of the company's financial outlook.

Is the funding environment for defense and intelligence sectors improving, or will it remain strained even after the government reopens post-shutdown? - Louie DiPalma (William Blair & Company L.L.C.)

2026Q2: We are seeing a bit more positive environment in terms of the engagement with our customers and the willingness for them to say, 'Yes, we indeed have an appetite for taking on more work and we would like you to do it.' - Horacio Rozanski(CEO)

Have your tech partnerships gained more recognition given the 1.4x book-to-bill and Palantir/Anduril AESC Awards? Has the procurement environment improved in the past three months? - Michael Louie D DiPalma (William Blair)

2026Q1: The business has stabilized despite the dynamic environment. Contracts are being reviewed, but the tech holds out well. - Horacio Rozanski(CEO)

Contradiction Point 2

Impact of Fixed-Price Contracts on Profitability

It involves the impact of fixed-price contracts on profitability, which is a critical factor for investor assessments of the company's financial health.

How will you align the sales and workforce as the business model evolves, considering potential shifts in future risk exposure? - Sheila Karin Kahyaoglu (Jefferies)

2026Q2: Fixed-price contracts can be a win-win for both Booz Allen and the customer. They allow the company to productize on top of commercial tech, aligning with the department's desire for faster deployment and outcome-based approaches. - Horacio Rozanski(CEO)

Are fixed-price outcome-based contracts a win-win for Booz Allen and customers? - Michael Louie D DiPalma (William Blair)

2026Q1: There's a fixed-price contract that we have with the federal government, and we view that as leverage for fixed-price outcome-based contracts that will have the public sector being more receptive to those kinds of contracting vehicles. - Horacio Rozanski(CEO)

Contradiction Point 3

Funding Environment for Defense and Intelligence Business

It highlights differing perceptions of the funding environment for the defense and intelligence business, which impacts revenue and growth expectations.

Are there signs that the funding environment for the defense and intel business is improving? - Louie DiPalma(William Blair & Company L.L.C.)

2026Q2: While the civil business is in a challenging market environment, the national security business is stronger, but still has friction. - Horacio Rozanski(CEO)

Have you noticed a slowdown in awarding task orders or contract adjudication with any specific customers? - Gautam Khanna(TD Cowen)

2025Q3: We've seen no impact from executive orders on our contracts. There is some slowdown in the procurement environment due to agencies adjusting to the new administration. We expect this quarter to remain dynamic, but we are bullish about next year. - Matt Calderone(CFO)

Contradiction Point 4

Civil Business Stability

It involves differing perspectives on the stability of the civil business, which is crucial for revenue forecasting and business strategy.

Are you seeing signs that the defense and intel funding environment is improving? Or will it remain strained even after the government restarts? - Louie DiPalma(William Blair & Company L.L.C.)

2026Q2: So we're not -- we're not seeing significant changes in the funding environment. And in fact, I would say that our national security business, which is -- which is a -- which is growing and has been growing, is actually stronger than it was a year ago. - Horacio Rozanski(CEO)

Given the unpredictable nature of de-scoping and cancellations, how confident are you that you've fully assessed the impact and anticipate no further developments this year? - Gavin Parsons(UBS Investment Bank)

2025Q4: In terms of the slower pace of procurement, this is a market dynamic that we expected and that we see affecting other large systems integrators across our industry. - Horacio Rozanski(CEO)