Booz Allen Hamilton Holding Corporation (BAH) Earnings

Management highlights

- Market & Operating Environment * The overall market remains dynamic and uneven, with Q1 overall funding up 17% year-over-year driving positive momentum, but midterm U.S. election cycle creates budget process uncertainty and possible funding delays, especially in the second half of the fiscal year. * The U.S. government is accelerating procurement reform to make fixed-price outcomes-based contracts the default, which is positive long-term but may cause near-term award delays as customers adjust procurement processes. - Strategic Growth Priorities & Progress * The company is prioritizing accelerating growth in cyber and defense tech, investing in emerging next-generation technologies including autonomy/physical AI, quantum, 6G, and AI RAN, and leveraging strategic partnerships and venture investments to drive growth. * In cyber: Agentic AI has reshaped the cyber threat landscape, increasing demand for advanced defensive capabilities. The company is expanding its Velox agentic cyber product suite, which combines deep tradecraft expertise and AI capabilities, and is seeing strong customer engagement across government and commercial markets. * In defense tech: The company announced an agreement to acquire Ultra IMC Mission Solutions, which has a complementary portfolio of command and control software, ruggedized edge compute, and encryption management products. The acquisition is expected to close in Q2 FY27 and will scale the company's defense tech product offerings. The company is also building and integrating advanced solutions for warfighting advantage, including soldier-worn tech, battle management systems, and resilient communications. * In emerging technologies: Post-quantum cryptography (PQC) demand is accelerating following new executive orders and OMB guidance, and the company is well positioned to scale PQC transition services for government and commercial clients, having won its largest pure-play quantum award this quarter. The company also won a new AI RAN award this quarter to bring 6G capabilities to edge missions. - Operational Shifts & Capability Investment * The company supports the shift to outcomes-based fixed-price contracting, and has already seen a 18% year-over-year increase in other transaction authority (OTA) pipeline opportunities. It has also positioned its technology solutions on government marketplaces to enable faster, more flexible procurement and product scaling. * AI is embedded across all business areas: it is used to improve internal operational productivity, and integrated into customer solutions. Examples include a multi-agent AI system for intelligence collection that reduces manual work and improves speed, and edge-deployed AI for forward-deployed warfighters operating in limited connectivity/contested environments. - Civil Segment Transition * The civil segment is in a near-term transition, but leading indicators are improving: demand is strengthening, win rates are holding steady, and the company is pulling cyber and defense tech solutions into civil agency customers to drive future growth.

Guidance

- Management reaffirms all full-year fiscal 2027 guidance, maintaining prior targets and keeping guidance unchanged this quarter, as it remains early in the year and management maintains caution around funding and award uncertainty. - Full-year national security segment growth is still expected to be in the mid single digits, with growth back half-weighted as new work ramps up in the second half of the year. - A sequential double-digit decline in civil revenue is expected in the second quarter, driven by ongoing contract roll-offs and smaller recompete headwinds; these near-term first-half dynamics are expected to gradually ease in the second half of the year, with the full-year civil segment expected to decline in the high single digits (an improvement from last year's decline). - Full-year adjusted operating margin is still expected to be approximately 11%, with a margin step-down expected for the remainder of the year, particularly in Q2, due to the end of higher-margin civil programs and backloaded annual investment spending. - The pending Ultra IMC Mission Solutions acquisition is not included in current full-year guidance; guidance will be updated to include the transaction after it closes in Q2.

Segment performance

Overall company revenue declined 4.2% year-over-year to $2.8 billion. Revenue ex-billable expenses decreased 3.8% year-over-year. Adjusted EBITDA was $334 million with a margin of 11.9%, up 130 basis points year-over-year. Adjusted diluted earnings per share increased 22% year-over-year to $1.81. Free cash flow was $261 million. Total backlog reached over $39 billion, up 3% year-over-year, with funded backlog increasing 15% year-over-year to $4.7 billion. 1. **National Security Segment**: Grew 1% year-over-year in the first quarter, representing ~75% of total company revenue. Funded backlog for the segment grew 23% year-over-year, with overall Q1 funding up 17% year-over-year company-wide and 18% year-over-year for the segment. 2. **Civil Segment**: Declined 16% year-over-year, representing ~25% of total company revenue. The decline was driven by roll-off of prior large contracts, fewer new program starts from last year's slow award environment, and smaller scope for recently won recompete contracts, creating near-term comparable headwinds.

Risks & headwinds

- U.S. congressional legislative processes (including the NDAA, potential continuing resolution (CR), reconciliation bill, and defense supplemental funding) create uncertainty around full-year funding trajectories, with outcomes shaping whether the current strong funding momentum continues into the second half. - Budget process delays and uncertainty from the 2026 U.S. midterm election cycle could create funding disruptions, particularly in the second half of Booz Allen's fiscal year. - The shift to government-wide fixed-price contracting, while positive long-term, may cause near-term award delays as customers adjust procurement processes and contract structures, and introduces new performance risk that requires careful contract sizing and risk management. - Hiring supply constraints for cleared personnel have left the company slightly behind on hiring targets for growing national security segments, which could near-term growth ramp if not addressed quickly. - Proposed NDAA language that would restrict shareholder capital return for defense contractors without a qualified investment plan creates policy uncertainty, though the language is still evolving and management notes all capital deployment avenues remain open at this time.

Analyst Q&A

• Q: Management reaffirmed full-year guidance despite strong first-quarter funded backlog and funding growth. Are there company-specific factors creating second-half uncertainty, and is the pending Ultra acquisition excluded from current guidance?

  A: Management notes first-quarter performance was very strong driven by solid execution and strong sales, with good forward indicators, but the legislative and budget environment remains dynamic. Key congressional processes will shape full-year funding outcomes, so management maintains a cautious stance and keeps guidance unchanged early in the year. The Ultra acquisition will be added to guidance after it closes in Q2 on the next earnings call, with cyber and defense tech positioned as clear near-term tailwinds, supporting cautious optimism overall. ---

• Q: How is agentic AI changing cybersecurity demand, and how is Booz Allen positioned to capture this growth given its existing cyber talent and partnerships?

  A: Agentic AI-driven autonomous offensive cyber attacks have created rapidly accelerating demand for improved defenses across government and commercial customers. Booz Allen is positioned at the intersection of decades of cyber tradecraft experience and over 10 years of AI investment, giving it a first-mover advantage. The company offers a full capability stack: high-demand zero trust solutions to limit attack blast radius, the Velox agentic defense suite, and the new Ranger product for AI-speed vulnerability remediation, with additional products in development. Booz Allen partners with all major frontier AI model providers including OpenAI and Anthropic to deliver differentiated, secure solutions, with productized cyber offerings expected to drive faster margin and bottom-line growth than top-line growth. ---

• Q: What are the fastest-growing subsegments within the national security portfolio, and how is the business structured to capture this growth?

  A: The highest growth potential (particularly for bottom-line profit) comes from cyber and defense tech, which cut across the entire consolidated national security business. Beyond these, the space business is also performing well with solid upside. Booz Allen consolidated defense and intelligence into a single national security segment because growth capabilities now span the full spectrum, so separate subsegment reporting is no longer useful. The main near-term constraint is a slight backlog in hiring cleared personnel, which management is actively addressing to support faster growth ramp. ---

• Q: With the U.S. government shifting to make fixed-price contracting the default, how much will the contract mix shift, and what impact will this have on margins?

  A: The administration has mandated that all new contracts be firm fixed-price unless an exception is approved, so a shift is underway, but it will not happen overnight, as existing contracts do not turn over immediately. Management has already planned for this shift, and welcomes the direction of travel: it aligns accountability, creates delivery flexibility, and over time allows efficient operators like Booz Allen to earn higher returns. It is still too early to predict the final mix by year-end, but early results this quarter (which saw margin expansion partially driven by early fixed-price adoption) are positive, and Booz Allen already has extensive experience executing fixed-price contracts.