Booz Allen Hamilton Holding Corporation (NYSE:BAH) Q2 2023 Earnings Conference Call October 28, 2022 8:00 AM ET
Company Participants
Nathan Rutledge – IR
Horacio Rozanski – CEO, President & Director
Matt Calderone – EVP & CFO
Conference Call Participants
Gavin Parsons – Goldman Sachs Group
Sheila Kahyaoglu – Jefferies
Louie Dipalma – William Blair
Bert Subin – Stifel
Cai von Rumohr – Cowen and Company
Rocco Barbero – JPMorgan
Robert Spingarn – Melius Research
Colin Canfield – Barclays
Operator
Good morning, and thank you for standing by. Welcome to the Booz Allen Hamilton’s Earnings Call Covering Second Quarter Fiscal Year 2023 Results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions.
I would now like to turn the call over to Mr. Nathan Rutledge.
Nathan Rutledge
Thank you, operator. Good morning, and thank you for joining us for Booz Allen’s second quarter fiscal year 2023 earnings call. We hope you’ve had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. With me today to talk about our business and the financial results are Horacio Rozanski, our President and Chief Executive Officer; and Matt Calderone, our Executive Vice President and Chief Financial Officer.
As shown on the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning are forward-looking and may relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our filings with the SEC 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, whether as a result of new information, future results or otherwise.
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 second quarter fiscal year 2023 earnings release and slides.
It is now my pleasure to turn the call over to our CEO and President, Horacio Rozanski. We are now on Slide 4.
Horacio Rozanski
Thank you, Nathan, and good morning, everyone. Thanks for joining the call. Before diving into the financial results this morning, I would like to begin by acknowledging the seamless transition of our Chief Financial Officer role, from Lloyd Howell to Matt Calderone, two outstanding professionals with great track records at Booz Allen.
As we announced last month, Lloyd Howell is retiring on December 31. I am grateful for Lloyd’s tremendous contributions over his 34 year career with Booz Allen and especially, his last six years as CFO. Lloyd greatly advanced our relationship with the investor community.
Under his leadership, Booz Allen learned to define and communicate long term investment parameters and articulate our position as an organic growth leader. I will miss Lloyd’s voice in our internal discussions and these earnings calls. And I know he will go on to do amazing things in the future.
Our new CFO, Matt Calderone stepped into the role on October 1. Matt has been with Booz Allen for 20 years and has an exceptional record of driving success for our firm. He began his career at Booz Allen in our old commercial business, the same business where I began. And then transitioned to serve intelligence clients. He joined my direct team in the early days of Vision 2020 and was the driving force in making that strategy a reality.
Matt went on to launch our corporate development function and in 2017 partnered with Lloyd to lead strategic finance and transform our forecasting planning and analysis function. Most recently, Matt served as our Chief Strategy Officer. All those experiences have prepared Matt to step into the CFO role and continue to drive our firm’s success. I am personally fortunate to have a leader of Matt’s caliber and experience as our CFO. Matt, it is my pleasure to have you join us on these earnings calls.
Let’s turn now to business performance. Matt and I are very excited to share excellent results for the second quarter of fiscal year 2023. During this quarter, we continued our strong revenue and EBITDA growth and accelerated both our hiring and business capture. When we began the fiscal year, we shared with you our plan to build momentum in the first half to mitigate potential for increased volatility in the second half.
We also shared our view that VoLT, our growth strategy centered on velocity, leadership and technology, it’s not only our future but also our present. This means that we need to move rapidly to implement our strategy in order to meet our multi-year goal of growing adjusted EBITDA from $935 million last fiscal year to $1.2 billion to $1.3 billion by fiscal year 2025.
The headline for today is this; halfway through the fiscal year, we believe we are operationally and strategically on track to deliver on our multiyear goals. And in fact, we expect to deliver above planned financial results in fiscal year 2023. Therefore, we are pleased to raise our guidance for this fiscal year. We now expect our revenue growth range to be 8% to 10% and adjusted EBITDA range to be $975 million to $1.015 billion. Matt will cover the numbers and guidance in detail.
But first, I would like to take some time to frame these results as part of our larger business journey. I will first discuss how our FY ‘23 operational priorities impact this fiscal year financials. Then, I’ll cover the broader progress we are making on VoLT, with a specific focus today on the technology dimension.
As you can see, the numbers for our second quarter of fiscal year 2023 speak for themselves. While uncertainty from inflation, recessionary fears, geopolitical conflict and ongoing budget debates remain, we have generated great momentum, which is reflected in the progress we are making against the operational priorities outlined in our May earnings call.
Let me take a moment to summarize that progress. First, our top operational priority continues to be hiring. Client staff headcount has grown 4.2% over the past 12 months in a very competitive labor market. And we are seeing historically strong absorption of new hires into billable programs. These concurrent improvements are the result of transformative work by our recruiting and business teams under the leadership of our COO, Kristine Martin Anderson. Today, I am also excited to share that we have crossed the milestone of 30,000 Booz Allen employees.
Our second priority is to continue to win high quality work at the intersection of key missions and new technology. Our leaders delivered an outstanding quarter of contract awards, resulting in record backlog and a 12 month book-to-bill of 1.32 times. Third, our leaders are managing the business extraordinarily well and delivering on the bottom line. We’re effectively managing costs in an inflationary environment. As evidenced, for example, by the significant difference in client staff headcount growth versus total headcount growth. This provides resiliency and enables investment, which is key to fueling future growth.
And fourth, we must deploy capital in a way that creates maximum value for our stakeholders and drives our strategy forward. As we announced earlier this month, we are pleased to have closed on the acquisition of EverWatch. We’re excited about the opportunities EverWatch creates to accelerate our National Cyber business.
Building on this strong operational backdrop, we’re also making significant progress in implementing VoLT. In the next few moments, I hope to illustrate, how our innovation agenda and differentiated technology solutions uniquely position us to accelerate growth and contribute to achieving our multiyear investment thesis goals.
Our clients live in an increasingly complex environment, pressured by geopolitical instability, global challenges for pandemics to climate change and the increased need to invest in new technology, while at the same time sustaining legacy programs, all in a fraught political and economic environment. We believe we are uniquely positioned to use innovation to simultaneously help our clients navigate these complex challenges and drive our own financial performance. Our basic premise is that technology cycles come in waves that are growing in both amplitude and frequency.
Booz Allen’s approach to innovation centers on helping our clients translate new technologies into mission success beyond the prototype to full scalability. We believe this requires three things. One, extensive knowledge of the mission and its requirements. Two, insights and access to new technologies early in their lifecycle. And three, an integrated talent base that can quickly scale to provide solutions and services. An excellent example of our innovation approach is our support for the Department of Veterans Affairs, where Booz Allen plays an integral role in supporting their digital transformation.
Over the past decade, we have invested to grow our technical talent, deepen our mission expertise and build solutions to help the VA modernize, leveraging capabilities like low code, no code, AI, DevOps, Agile and cloud. Through acquisitions, we have continued to gain even greater scale and acceleration. Following this approach to innovating at the mission technology intersection, our VA business is over 6 times larger today than it was 10 years ago.
More broadly, VoLT has challenged us to reimagine our innovation agenda as part of a comprehensive Chief Technology Office. The role of the CTO is to continuously evolve our scale technology positions and anticipate the next waves. Our ongoing investments in key emerging technologies are already building momentum. For example, we are integrating cyber and AI in our cyber pre-coke (ph) platform for the Threat Hunter (ph) at the tactical edge. We are anticipating the implications of post quantum encryption.
And we are developing 5G prototypes that provide dynamic spectrum sharing through an AI sensing application. Returning for a moment to the VA example. Our investments in emerging technology are central to their next set of mission requirements. For example, we are developing digital twin solutions to innovate the planning and design of hybrid operating rooms using AI power design and clinical workflow simulations.
All of this is only by the small sampling of how our innovation agenda is positioning us for future growth. These next generation solutions and many more are becoming real today. We’re excited to begin showcasing them more broadly, when the Helix, a reimagined center for innovation opens mid-November. We hope you will visit the physical or virtual versions of the Helix later this year.
A closing thought, our investment in organic growth, our strong balance sheet, our evolving operating model and above all, our exceptional team give me confidence that we are on track to accomplish the ambitious strategic and financial objectives outlined in VoLT and our investment thesis. I am bullish about the future of Booz Allen.
And with that, Matt, welcome to the earnings call. Over to you to take us through the financial results in-depth.
Matt Calderone
Thank you, Horacio, and good morning, everyone. It’s a pleasure to be speaking with you today. First, I want to echo Horacio’s sentiments. Lloyd did an outstanding job as CFO. He built a world class team and developed a financial strategy that continues to generate durable value for all of our stakeholders. And on a personal note, Lloyd has been a true friend and a great mentor to me. I’m excited for the opportunity to lead our finance team, to work with Booz Allen’s outstanding group of leaders to deliver results and to engage with you along the way.
As you know, we said that we wanted to come out of the gates with a strong first half this fiscal year and we did exactly that. These exceptional results position us to exceed our original plan for this fiscal year, even while ramping up strategic investment in the back half of the year to fuel ongoing organic growth. And as Horacio noted, our results put us on track to meet our multiyear investment thesis objectives.
Now please turn to Slide 6, as I discuss our fiscal year 2023 second quarter results. I will start by hitting the highlights of our performance. At the top line, revenue grew 9.2% in the second quarter, reflecting growth across all of our markets and particularly strong performance in our Civil business. We generated $286 million of adjusted EBITDA in the quarter, a 6% improvement over the prior year with an adjusted EBITDA margin of 12.4%. This translated to $1.34 of adjusted diluted earnings per share. And lastly, we deployed $87 million in capital in the quarter exclusive of the EverWatch acquisition, which closed after quarter end.
I will now cover the details of our second quarter performance in greater depth. As previously mentioned, for the second quarter, our revenue grew 9.2% year-over-year to $2.3 billion. Revenue excluding billable expenses grew 10.1% year-over-year to $1.6 billion. These results reflect another exceptional quarter of organic revenue growth driven by the ongoing strategic repositioning of our business, strong demand for our solutions, headcount growth and higher staff utilization compared to the prior year’s quarter.
Our top line performance was supported by revenue growth across all of our markets. In defense, revenue grew approximately 2% year-over-year in part due to lighter billable expenses. That said, in defense, we saw strong hiring throughout the quarter and a number of meaningful wins that we expect will provide good momentum for the back half of our fiscal year and beyond.
In Civil, revenue grew by approximately 18% year-over-year, highlighted by particularly strong results in our health account. Our civil performance reflects the power of two pillars of our VoLT strategy, building strategic positions at the intersection of mission and technology, and using targeted acquisitions to accelerate our technical capabilities and organic growth.
Our Intelligence business grew by approximately 9% year-over-year. Building on this team’s hiring and portfolio shaping efforts, of the past year. And finally, in Global Commercial, revenue grew by approximately 25% year-over-year. In the quarter, we completed the divestiture of our commercial business in MENA, which was a solid but non-core asset. I’m pleased that we found a good home for our clients and employees in the region.
Now please turn to Slide 7 for details on our demand signals. Net bookings for the quarter were approximately $5.5 billion, which translates to a quarterly book-to-bill of 2.4 times and a trailing 12-month book-to-bill of 1.32 times. Total backlog grew approximately 9.8% year-over-year, resulting in our largest ever backlog of $31.8 billion.
We saw growth in all three portions of our backlog. Funded backlog grew 11.3% to $5.5 billion. Unfunded backlog grew 8.9% to $10.4 billion and price options grew 9.8% to $16 billion. These outstanding results once again demonstrate that we are not demand constrained. We continue to win the right type of work to meet both our financial and our strategic aspirations.
Pivoting now to headcount, we had an increase of approximately 800 client-serving employees in the second quarter, even after taking into account the roughly 100 employees that exited with our MENA divestiture. This performance was outstanding, particularly in light of what remains a tight labor market.
Our client serving headcount is now up approximately 1,100 employees or 4.2% year-over-year. This sets us up very well to continue our top line momentum in the near term. As I mentioned earlier, at the bottom line, we generated $286 million of adjusted EBITDA in the quarter, which is up 6% year-over-year. We ended the quarter with an adjusted EBITDA margin of 12.4%, which is down 40 basis points year-over-year, but slightly ahead of our expectations.
Our margins continue to benefit from strong contract level execution, a slight mix shift towards higher fee generating work and our ongoing strategic cost management efforts. Based on our strong operating performance and the gain from the sale of our MENA business, partially offset by higher interest expense, net income increased 10.3% year-over-year to $171 million.
Adjusted net income was $178 million, up 4.5% year-over-year. Diluted earnings per share increased 12.3% to $1.28 from $1.14 in the prior year period and adjusted diluted earnings per share increased 6.3% to $1.34 from $1.26.
Turning to the balance sheet. We closed the second quarter with a cash balance of $757 million and a $1 billion untapped revolver. In September, we closed on the ninth amendment to our credit agreement. This allows us to continue to optimize our capital stack, including increasing the weighted average maturity of our debt. Free cash flow for the quarter was $257 million, the result of cash generated from operating activities of $273 million, less $16 million of capital expenditures.
Turning now to Slide 8. During the second quarter, we returned $87 million of capital to shareholders through $30 million of share repurchases and $57 million in quarterly cash dividends. Net debt at the end of the second quarter was approximately $2.1 billion, and our net leverage ratio was approximately 2.1 times EBITDA. As previously mentioned, after quarter end, we closed on the acquisition of EverWatch. This acquisition is a prime example of a strategic accelerator that will allow us to bring technical and business model innovation to our clients.
We are thrilled to welcome the EverWatch team aboard. Our intelligence market team is eager to work with them to expand our deep pipeline of opportunities and to better serve critical national security missions. We anticipate that this transaction will be accretive this fiscal year. Finally, today, I am pleased to announce that our Board of Directors has approved a quarterly dividend of $0.43 per share payable on December 2 to stockholders of record on November 15.
I will now address our revised guidance for the full fiscal year 2023. Please turn to Slide 9. At the top line, we are increasing guidance for revenue growth to be between 8% and 10%, which includes inorganic growth of between 1% and 2%. This is due to our strong first half performance, as well as the hiring and bookings momentum that our team has built. We anticipate that revenue growth will moderate slightly in the second half as compared to last fiscal year, which included a seasonally high billable expense mix. We are very pleased with the underlying momentum in our business.
Similarly, we are raising our adjusted EBITDA guidance to a range of $975 million to $1.015 billion. We are also increasing our adjusted EBITDA margin outlook which we now anticipate will be in the high 10% to low 11% range. These increases are based on our revenue outlook, typical seasonal spending and margin patterns and our intent to invest more heavily in the back half of the fiscal year to drive sustainable organic growth.
We are also increasing our ADEPS guidance to a range of $4.25 to $4.50. This increase in ADEPS guidance is driven by our strong operating results, partially offset by a modest increase in interest expense. We still expect capital expenditures to be in the range of $90 million to $110 million as we continue to invest in infrastructure and technology.
Finally, as shown on Slide 10, due to the expected increase in profitability, we now expect our operating cash flow, excluding taxes to be between $875 million and $950 million. Earlier this month, we received a partial tax refund for our prior strategic tax planning initiatives. As a result, our expectation for net cash taxes to be paid this fiscal year has decreased to $315 million, including both a normalized tax rate and the impact of Section 174. This brings our anticipated operating cash flow inclusive of taxes to between $560 million and $635 million for the full fiscal year.
In closing, let me echo Horacio again and say how proud I am of our strong performance during the second quarter. This performance was only made possible by the hard work and dedication of our now 30,000 employees. As a result, we remain on target to execute against our strategic and financial objectives, allowing Booz Allen to continue to create superior shareholder value.
With that, operator, let’s open the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Gavin Parsons with Goldman Sachs. Your line is open.
Gavin Parsons
Hey. Good morning. And Matt, congrats on the new role.
Matt Calderone
Thank you.
Horacio Rozanski
Good morning, Gavin.
Gavin Parsons
You talked about uncertainties into the second half of the year, we’re a little ways into a continuing resolution right now. It seems like last year, that CR was particularly disruptive. Can you talk a little bit about what the environment looks like today and if you have any improved visibility, kind of relative to first half — sorry, first quarter?
Horacio Rozanski
Sure. Thanks for the question. Obviously, we feel great about the results in our second quarter and the entire first half. It’s consistent with the plan we outlined at the beginning of the year of trying to build momentum in the first half in anticipation of potential volatility in the second half. And we continue to look closely at some of those factors. We’re 11 days away from an election. There’s — as you pointed out, we’re under CR. We’re very mindful of all of that and that’s built into our guidance.
But as you saw our guidance, we are, at this point, expecting a strong first — second half and a strong full year. If I get underneath that, demand for the work that we do is very strong, and you see that in our numbers. Our talent base is growing nicely and accelerating this milestone of 30,000 Booz Allen people. I’ve been here a long time, it would have been unbelievable to me a few years ago, but we’re here and the quality of the talent is exceptional. We are well positioned.
If I could capture the way we look at the future is we have strong organic growth momentum really across all elements of our business. We’re investing in the things we said we will invest under VoLT to see growth beyond what’s the near-term horizon. And we’re on track to deliver against our investment thesis, which is the commitment we made to all of you. So as I said, we understand the volatility in the environment that we’re playing close attention. But right now, we feel very good.
Gavin Parsons
Okay. Great. And then in terms of our investment in new technologies and innovation a couple of years ago, conversation I think focus a lot more around some of these call option initiative investments. And I think today, it’s evolved a little bit more towards the new technologies conversation, which you gave a lot of detail on. So can you talk a little bit just about how that strategy has evolved?
Horacio Rozanski
Sure. When we were working through what we called option value as part of a set of initiatives for the last four or five years, we really learned a lot about our ability to both create technology and integrate partner technology into solutions, and we saw really some strong progress.
Rec.gov is a program we’ve talked about over the years, Rec.gov is doing great and frankly, exceeding our expectations. And like that, we see other upside. What I think we learned as part of VoLT is that the best place for us to innovate is at the mission technology intersection, working in the places where we have strong mission presence, driving really new technology into that.
I was at AUSA. A couple of weeks ago, I know a number of people on this call. When there I was talking to clients, and I was watching clients in particular react to some of the things that we’re doing around AI and 5G to bring information to the edge in potentially challenging environments. And I tell you the level of excitement there gave me a lot of optimism that we’re on the right track.
And so when you look at our investments in health and DVA that were in our prepared remarks, when you look at our digital battlespace investments, National Cyber and the like, we think that that’s the right path of evolution is to take everything we learned over the last few years and really pour it into these key mission technology intersections that are prime for hyper growth. moment.
Gavin Parsons
That’s very helpful. Thank you.
Horacio Rozanski
Thank you.
Operator
One moment. We have a question from Sheila Kahyaoglu with Jefferies. Your line is open
Sheila Kahyaoglu
Hi. Good morning and welcome Matt, and thank you Horacio for those comments.
Horacio Rozanski
Hey, Sheila.
Matt Calderone
Good morning.
Sheila Kahyaoglu
So maybe if I could just ask about EverWatch, you’ve completed it in the quarter, so that’s great. As you think about your continued M&A strategy and how it drives into your long-term growth, can you maybe discuss how you’re thinking about that? You also mentioned the success you’re having at Health & Liberty. So if you could just elaborate on how you’re thinking about the M&A strategy given the change in CFO. Thank you.
Matt Calderone
Thanks, Sheila. The sort of answer to your question is, no change in strategy. We still view M&A as an accelerant. I think Liberty is a great example of how M&A cannot just catalyze organic growth over time, but brining new capabilities into the fold, as Horacio just discussed. And we see ever watch very much in the same vein. We’re really excited to get the team on board after seven months between signing clues, which is something quite frankly, none of us anticipated and early returns are positive.
Our team and their team are working together to think through how we can take their technical and business model innovation and combine it with us, ours to bring greater value to clients, and that’s going to accelerate organic growth. So we have a strong pipeline. We’d love to follow that playbook, but we’re going to remain patient and disciplined.
Sheila Kahyaoglu
Thank you so much.
Operator
Thank you. Our next question comes from Louie Dipalma with William Blair. Your line is open.
Louie Dipalma
Good morning, Horacio, Lloyd, Matt, Nathan and Megan. And congrats to Matt and Lloyd.
Matt Calderone
Thanks, Louie.
Louie Dipalma
For Horacio, how do you view the opportunity to more aggressively pursue cybersecurity consulting for local and state government agencies? There seems to have been trillions of dollars of scheduled government stimulus, part of which is dedicated to protecting critical infrastructure and you established the CyberSaint partnership. Do you view local and state government as an underpenetrated market for you?
Horacio Rozanski
Louie, we go back to the question of state and local every few years. The fact of the matter is Booz Allen does not have a ton of expertise in state and local channels. Our Tracepoint team does a fair amount of work there, and we’ll continue that. We’re not seeing sort of going into that type of wide space as a major opportunity. Right now, what we see as the major opportunities are to really double down on this mission technology intersections where we have clear presence, clear mission understanding we’re bringing in new technology.
And then the key point that I think is getting missed in a lot of the conversations is, we can scale. Louie, I don’t know if you have the chance to spend time at AUSA, but you see a ton of prototypes. But prototype to mission impact is a very long, challenging road. And that’s where I think we, as Booz Allen, are doubling down is the ability to not just bring these technologies and show a client what the technology can become.
It’s actually to make that technology real. And so while there are opportunities in state and local, there’s probably opportunities internationally and a number of other places, and we’re not oblivious to all of that. Right now, what we’re focused is in creating hypergrowth in some designated mission technology intersections.
Louie Dipalma
Great. And you guys demonstrated robust hiring during the quarter. Is that sustainable for the second half of the year? How much seasonality is there for your headcount additions?
Horacio Rozanski
So there’s always seasonality. And Q2 is always a strong quarter for us. I think this Q2 was particularly strong because sometimes those numbers include both our summer interns and sort of college hires. And the bulk of the hiring in this quarter was actually experienced talent. So I think that speaks to the robustness of our talent pipeline and our value proposition with these really critical resources that are so important to our business.
Let me give you an example. I mean we always talk about the fact that we’re not demand constrained. So we have a significant intelligence contract that is probably scheduled to end next fall. I think, in the September timeframe. And as we look at that, at least some of the work may move to other vehicles, vehicles that we don’t hold.
But we have so much demand for the talent that is doing that work now for these exquisite classified technical talent that we have opportunities to fill other open reqs across a number of other vehicles in Intel and beyond. And that is really the core of the realm is being able to deploy unique talent to do this work. That’s what’s actually driving our growth.
I mean at this point, the rate limiting step to growth is in Intel, for example, is clear talent, not vehicle availability, which I know we talk — everybody talks a lot about. And so we’re feeling good. We’re feeling like the changes that we’ve made to our recurring process and to our employee value proposition are sustainable. It’s still a challenging talent market out there quarter-to-quarter. The numbers will fluctuate, but I think we’re on the right track.
Louie Dipalma
Thanks.
Operator
Thank you. And our next question comes from Bert Subin with Stifel. Your line is open.
Bert Subin
Hey. Good morning, and I’ll echo my congratulations to both Matt and Lloyd.
Matt Calderone
Thank you.
Bert Subin
Thanks for the time. So previously, you highlight expectation for some medium-term margin pressure, which seems to be expected to materialize over the next one to two years, that, however, it doesn’t really seem to be impacting your business this year with the raised margin guidance. Can you just talk about what the primary tailwinds and headwinds to margins are from here?
Matt Calderone
Absolutely. I think margins are driven by a couple of factors. One is the mix of our business. So our civil business tends to be a little higher margin than security in Intel. And that’s highly correlated, obviously, to contract type. That’s where more of our fixed price work exists. Second factor is billable expenses, which in general, we call empty calories, but they do impact EBITDA margin, if not EBITDA itself. And then third is cost management, and we’re doing really well on that front, both on the unallowable side and within the rates.
Bert Subin
Okay. In terms of… I’m sorry go ahead.
Matt Calderone
But in the short run, we don’t really manage our business based on margin. There’s a reason we chose EBITDA dollars from an investment thesis perspective, and we think we’re really on track there. We’re happy with the 6% EBITDA dollar growth that we’re demonstrating year-over-year. So margins are important, obviously, but that’s not the primary objective.
Bert Subin
Yeah. No, I guess I was mentioning it seems like maybe you’re outperforming there a little bit, I guess, relative to what the expectations were that were set out.
Matt Calderone
Maybe — we’re doing slightly better than we thought this year. And that obviously, that’s reflected in our guidance.
Bert Subin
And then Matt, just to follow-up to a comment there on civil performance that it was really strong during the quarter. I think there was an expectation, at least coming into this quarter that DoD intel would be really strong. And I think you saw that on the intel side. As we start to look forward, do you think the sort of the setup is similar where health and some of the things you’re doing on the civil side continue to drive outperformance there, at least from a sales growth perspective.
Matt Calderone
Yes and no. I think are we going to see 18%, 20% growth in Civil year-over-year. Probably not, that will come down a bit. We’re still working off some of the Liberty accelerant factor, even though it’s not in — it’s not in organic growth numbers, but we’re still seeing some of the near-term synergies there. But on defense, although, it showed growth in the 2% range, if you pull back, that really was driven by some year-over-year comps from a billable expense perspective, underlying, it’s much stronger. So I do think you’re going to see a little bit of a normalization across the three markets, but we’re very excited with the ongoing performance of Civil and our Health business as well.
Horacio Rozanski
And let me build on that, sort of the market strategic level. If you look at — we’re well aligned to the administration’s domestic agenda strong investment in public health, where we have a tremendous business and a lot of upside. The modernization of the IRS, where we have a long-standing presence and a lot of opportunity, and increasingly, we’re focusing on climate and how we can bring technology and AI and those kinds of things to the climate question. But then when you shift over to the National Security side, the national security strategy was just released, and it speaks to this as the defining decade.
The National Defense strategy just came out and once again speaks to China as the patient competitor for the U.S. and the need to invest in technology in order to stay ahead of that competition. And all of that, I think Booz Allen is — really has a unique position that we built over the last decade at the intersection of mission and technology where we are bringing these very new technologies, sometimes do all use technologies between commercial and government in a way that they’re scalable into these massive challenges. And so as Matt said, I think the numbers are over time going to reflect the fact that we’re well positioned and have strength across all of our markets.
Bert Subin
Thanks, Horacio and congratulations.
Operator
Thank you. We have a question from Cai von Rumohr with Cowen. Your line is open.
Cai von Rumohr
Yes. Thanks so much and welcome, Matt. So could book-to-bill — my understanding is that you had 2 billion in outstanding bids that were expected to be decided in the last week of September. Did those bids get decided? Were they in your favor? And if not, what are we looking for in terms of bookings potential in the first quarter?
Horacio Rozanski
Cai, I’m not sure exactly which procurements you’re talking about. There are some things that we want that are under protest. So I don’t know the specific answer to your question. What I will say is this, a 2.4 very robust book-to-bill quarter that is both a number of significant billion dollar plus task orders and our traditional second quarter strength around tactical sales also returning, which then puts the 12 month book-to-bill in a really good place and puts backlog at record numbers. So at the risk of sounding like a broken record, we really are not demand constrained. The real opportunity for us is to continue to onboard the right talent in order to make sure that we actualize all that demand into revenue.
Cai von Rumohr
Great. And second one, if we look at EverWatch, I assume the change in organic growth is that you — going from one to one to two is that you added both the divested — took out the numbers for MENA, which are divested and you added in the numbers for EverWatch. A, is that correct? And B, could you give us some more color on EverWatch in terms of how much you expect add to revenues and earnings?
Matt Calderone
That is correct, Cai. We’re going to hold on giving specific numbers for EverWatch probably until next quarter. As I mentioned, it just closed two weeks ago. The teams are going through original synergy projections in business case. So we built in the overall numbers. But we’ll get back to you on that next quarter.
Cai von Rumohr
Thank you.
Operator
Thank you. And our next question comes from Seth Seifman with JPMorgan. Your line is open.
Rocco Barbero
Good morning. This is Rocco on for Seth.
Horacio Rozanski
Good morning.
Rocco Barbero
How does the current rate environment affect your thought process around levers versus one year ago at the Investor Day?
Horacio Rozanski
I’m not sure. The question broke up a little bit. I mean do you mind repeating it?
Rocco Barbero
Yes. How does the current rate environment affect your thought process about leverage versus one year ago at the Investor Day?
Horacio Rozanski
I got you. I heard burn rate environment, I was not sure it was current rate. Okay, so you’re talking about interest rates. We’re — as Matt said, when we were discussing M&A, our capital deployment strategy for the moment remains unchanged. We are looking for strategic accelerators that will actually allow us to accomplish VoLT our investment thesis and accelerate organic growth. We have some good examples of that in the past. We hope EverWatch will be another great example of that as we look forward.
When we make an acquisition, we look at three things. In sequence, number one, the opportunity to drive organic growth in the long term. Number two, the cultural fit and the connection to our people. And then number three, the numbers have to make sense. And obviously, with rising rates that raises that bar. But honestly, most of the deals that we look at and pass on never make it to that third question. It’s the first two where we say, no, this is not for us.
Rocco Barbero
Thanks. Then as a quick follow-up, defense growth has been a bit more muted than the other end markets. What might sort of shake that loose?
Horacio Rozanski
So I’ll start, I’m sure Matt will want to add. Actually, defense had a good quarter. It’s actually a little bit masked by the fact that our billable expenses in that business were lighter than they’ve been, lighter than we expected. But as we always say, we think about billable expenses as calories because they carry very little profit margin and very little EBITDA.
So if you look underneath that, the revenues produced by our talent, we see real acceleration there. And as Matt pointed out, with new people coming in over the last quarter strongly and good billability for new hires, we think there’s organic growth momentum there as there is in the other sectors.
Matt Calderone
That’s right, Horacio. We won some really high-quality work in defense. So I would say it has been shaken loose. As Horacio had mentioned, it was a little masked this quarter by some year-over-year billable expense comps. But you’ll see over the back half of the year that there’s strong momentum in our defense business.
Rocco Barbero
Great. Thank you.
Operator
Thank you. And our next question comes from Robert Spingarn with Melius Research. Your line is open.
Robert Spingarn
Hi. Good morning and welcome Matt.
Matt Calderone
Thank you.
Robert Spingarn
A couple of just quick things. Back to M&A for a minute and interest rates, with the higher rates, has private equity sort of backed out of the market a little bit? We’ve been hearing that. So less competition from them for M&A.?
Horacio Rozanski
I’m going to let Matt take that.
Matt Calderone
Yeah. I would say that private equity is backed out, particularly in the mid-tier in our market, not just buyers, but a lot of the sellers are private equity backed. I would describe this as a much more cautious market. Certainly, transaction volume has decreased given all the uncertainty we know from macro factors to interest rates, as Horacio mentioned, the regulatory environment. And what I think you’re seeing is that there are fewer large auction processes, and it’s a world where relationships and reputation matter. And we really think that plays to our strengths.
If you look at how we did Liberty, Tracepoint, EverWatch, they’re all outside of processes, they were targets that we identified that we thought met the criteria Horacio outlined. And we really took the time to get to know them and make sure it was the right fit, not just for us but for them. So I think you’re going to see more of that. I’m seeing more of that personally, having a different set of relationships with not just strategics, but a lot of private equity buyers and sellers. So no, I wouldn’t say the private equity firms are out of the market. That hasn’t been our experience.
Robert Spingarn
Okay. And then just switching gears a little bit, go back to the head count increases. We talked about it earlier, you’re up, I don’t know, 2%, 3% or so year-to-date in headcount depending on how you measure it. Your top line growth is more than double that even on an organic basis. I wanted to talk a little bit about that dynamic, Horacio. And does it reflect in any way the fact that the incremental headcount is just producing more revenues? Is that part of it? Is this a higher mix increase?
Horacio Rozanski
I think there’s a couple of drivers here. The one key driver is, if you look at the difference between total headcount and client staff headcount, client staff head count is up 4.2%. And — we’ve been — as Matt pointed out, we’ve been managing costs to make sure that in an inflationary environment, we can manage our rates. We are being prudent, and we create room to continue the investments we need to do under VoLT to secure future growth. About 4.2% client staff growth is really good, and especially in a market like this one. And it’s the kind of growth that over time is always sort of sustained our above market growth.
The second dynamic, which I talked a little bit about on the key — on the prepared remarks, is that one of the things Kristine has really has all of us focused on is not just on hiring, but on the process of going from hiring to somebody getting fully billable, which is a process that, frankly, used to take too long at Booz Allen, and we’re shortening that significantly. That allows us to get more revenue with a smaller bench, which drives billability, which then drives our ability to invest in talent, our ability to grow, and creates a bit of a virtuous circle here.
And I think that’s — I think that’s a sustainable driver in the near term as we look at the talent market evolution and what we’re doing internally. And I’ll finish with the — again, I mean, 30,000 people at Booz Allen is an exciting number for us and one that speaks of the success we’ve had over the last few years.
Matt Calderone
And Horacio, if I can just add. The third factor to the two you mentioned headcount growth and utilization, our wages have increased. And for the 75% of our contract base, our cost plus and T&M contracts, were for the most part we can pass those through. That’s driving revenue as well. We see that every year. When salaries go up, and we’re certainly seeing more of that this year than we have in the past.
Robert Spingarn
And just on that note with hiring. Just with the tech companies like Amazon, web services and Microsoft freezing hiring, especially in the D.C. area. Does that help you get talent in the door?
Horacio Rozanski
From my perspective, we’re seeing — it’s a challenging talent environment. I know there were significant announcements about tons of hires over the last couple of years. A lot of that we did not materialize really, there’s now conversation about maybe less hiring. We’re not seeing that materialize. The environment is challenging. One of the things we said to ourselves under VoLT is we’re probably going to have a tech talent shortage that was going to last a decade. And so we spent a lot of time rethinking and retooling our processes so that we can be successful hiring people in a constrained environment over the horizon.
Robert Spingarn
Okay. Well, it looks like that’s working. Thanks so much.
Horacio Rozanski
Thank you.
Operator
Thank you. And our last question comes from Colin Canfield with Barclays. Your line is open.
Colin Canfield
Hey. Good morning, and congrats Llyod and Matt. Could we just level set the EBITDA growth algorithm for us? I think the previous setup that we talked about from an organic growth perspective was mid-single digit hiring growth plus low-single digit wage inflation and then modest margin impression towards that FY ’25 EBITDA target with a placeholder of roughly $150 million to $200 million of acquired EBITDA. And how do we think about that kind of versus the slower implied organic headcount growth this quarter, as well as kind of an accelerating wage inflation environment? Thanks.
Matt Calderone
So I’ll take the first part of your question first. I think that model is the one we’re following. As Horacio said, we are on track for the investment thesis, not just in aggregate. But I think if you look at the piece parts of how it’s playing out, organic growth, inorganic and the like, it’s playing out how we expected. On the second part, I’m not sure I understood the question. With 4.2% year-over-year consulting staff headcount growth and the momentum we see in the business, that’s right on track with where we want to be, and I think it’s in line with the model that you articulated.
Colin Canfield
Okay. Got it. And within that construct, what sort of wage inflation should we be considered?
Matt Calderone
So we’ve said that we expect wage inflation this year in the 3.5% to 4.5% range and we’re within that down probably a little bit towards the higher end, which is higher than years past, but honestly not significantly higher than in years past.
Colin Canfield
Got it. And just one last question. You mentioned Mission Tech a little bit more than previous scripts. Can you just talk about how you guys are thinking about acquiring capital intensity and fixed price exposure versus kind of more headcount driven?
Horacio Rozanski
We’re really focused on mission technology intersections, and we’re focused on ensuring that our clients have what they need as scalable solutions to solve their problems. Some of that is partnering with people that have amazing technologies, products and solutions. Some of that is things we’re developing on our own.
And a lot of that is bringing a unique talent base that can actually take something that may be on a commercial shelf or even custom bill for the government and make it real into the mission, make it adapted and make sure that across different environments. And so forth, clients can get real value.
And this real value point is when you’re going to hear me talk about over and over because there’s always the risk that we become infatuated with some new technology, becomes a bit of a buzzword. A lot of money gets spent and no value gets created. And I think for us to continue to be the trusted player that we are in this market, our job is to ensure that we’ll bring the technology forward.
We help our clients really get value from that. And if you look at our numbers, not just this quarter or this half, but really the last decade, I think they speak to the fact that we’ve done that successfully, and that we will continue to do that. That’s our focus.
Colin Canfield
Got it. Appreciate the color.
Horacio Rozanski
Thank you.
Operator
Thank you. And there’s no other questions in the queue. I’d like to turn the call back to management for any closing remarks.
Horacio Rozanski
Thank you, operator. Thanks, everyone, for your questions, and thank you for joining us. I hope Matt and I did a good job of conveying our excitement about the strength of this business and the progress we’re making on VoLT and on the investment thesis. We feel confident about the future. I keep coming back, we’re 30,000 strong now, and we all look with optimism at the opportunities that are ahead for our firm, for our clients, for our people and certainly for our investors.
Let me close with a final point, a bit of an advertisement, if you don’t mind. Earlier this week, we published our new thought leadership publication, and it’s called Velocity. It’s available on our website. And in it, you’ll hear from Booz Allen and many of our experts about how emerging technologies can be applied to some of the nation’s biggest challenges about the critical role and innovation ecosystem place, empowering the digital revolution, about how to win the race for technology talent and many more. So I hope you’ll enjoy reading it, and it will give us feedback.
And with that, again, thank you for your continued interest. And with that [Technical Difficulty]
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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