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Booz Allen Hamilton Holding Corp (NYSE:BAH)
Q2 2020 Earnings Call
Nov 1, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's Earnings Call Covering Second Quarter Results for Fiscal Year 2020. [Operator Instructions] Later, there will be an opportunity for questions. I'd now like to turn the call over to Mr. Nick Veasey.

Nicholas Veasey -- Vice President of Investor Relations

Thank you. Good morning and thank you for joining us for Booz Allen's second quarter fiscal 2020 earnings announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We've also provided presentation slides on our website and are now on Slide 2.

I'm Nick Veasey, Vice President of Investor Relations, and with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President, Chief Financial Officer and Treasurer.

As shown on the disclaimer on Slide 3, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and, therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our Company's services and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our second quarter fiscal 2020 earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call.

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 2020 slides.

It is now my pleasure to turn the call over to our CEO, Horacio Rozanski. We are now on Slide 5.

Horacio Rozanski -- President and Chief Executive Officer

Thank you, Nick, and good morning everyone. Today, we have the pleasure of reporting another quarter of excellent operational and financial performance. Our second quarter numbers demonstrate, once again, Booz Allen's institutional strength and our leading position in the market. September 30th marked the midpoint of our current fiscal year and of the three-year period of our investment thesis. Lloyd and I are extremely pleased with where we are at this point against both our plan for this year and the multi-year objectives we set 18 months ago.

Today, we will summarize the firm's performance operationally and financially and discuss our expectations for the remainder of the year. As always, we will put it all in the context of our investment thesis.

Let me start at the strategic level. As you know, over the past seven years, we have transformed our firm into one that is more technically capable, more innovative, and operating in more mission-critical areas. We are showing clients how to get value from technology adoption at a time when they have the need and the resources to do so. Our aim has been to capture rising demand that's driven by fundamental shift from the hardware economy of the past to the software economy of today and the future. This is our Vision 2020 strategy. And as I have said before, Booz Allen is in the pay-off period.

Disciplined execution of our strategy has created powerful differentiation in today's market and, equally important, it has created a position of strength for us as we lean into the future. We have the agility, talent, and investment capacity to evolve our firm to meet the emerging demands in the market; demands driven by things like the fast-changing tech stack and the dynamic global strategic environment. We believe our proven ability to operate at the intersection of consulting, technology, and mission, while also anticipating what clients will need next, can sustain into the future of the firm's growth and our consistent record of performance. This is at the core of our value proposition for all stakeholders; from employees, clients, and investors, all the way to the people who are served by the missions we have announced and the problems we solved. This position of strength in the market is also the foundation for our core investment thesis goal of increasing adjusted diluted earnings per share from about $2 in fiscal year 2018 to about $3.30 in fiscal year 2021. The performance we delivered in the second quarter shows we remain on track to achieve our goal.

You'll recall that our plan for this fiscal year was to come out of the gates fast, executing a relatively aggressive first half and a more conservative second half. We set this plan in place last spring because of uncertainty about the federal budget. And while there has been progress in the budget and appropriations process, we are in the new government fiscal year and still not at the finish line. But our strong performance in the first half of our own fiscal year gives us confidence that we will end the year at or above our original guidance, for both revenue and adjusted diluted earnings per share.

Turning specifically to the second quarter. The results we report today are exceptional. We achieved a double-digit increase in organic revenue growth with excellent profitability. We had another outstanding quarter for hiring, I think, 600 people to our talent base, which brings us just shy of 27,000 total. Bookings were well diversified across our markets and seasonally strong as the government fiscal year ended. And as of September 30th, we set another record for backlog.

As you know, we manage the firm as a single P&L. This fosters agility and collaboration, and allows us to channel resources toward the best opportunities. Through the first half of the fiscal year, growth in Defense & Civil, representing roughly three-quarters of our business, is especially strong. In fact, it's ahead of our own expectation. The need for systems integration, digital transformation, and insertion of new technologies in areas such as cyber, data analytics, and immersive is fueling our continued success.

Shifting to the intelligence market, demand is also strong, but revenue growth is somewhat constrained by the need to source and hire highly clear talent. In global commercial, which represents 3% of our business, we'll probably be flat this year after three years of growth about 25%. Still, over the medium term, we continue to see great potential for profitable growth in this market. In this time [Phonetic] , leaders across our business are managing the business exceptionally well and capturing the right opportunities at the center of clients' missions.

Our teams, spread across hundreds of clients and locations worldwide, are skillfully delivering high-quality services and solutions. They are helping transform organizations and advance innovation. On the strength of their performance in the first half, today, we're excited to announce increases in our fiscal year 2020 guidance for revenue, operating cash, and adjusted diluted earnings per share, as well as an off-cycle increase in our quarterly dividend.

Before turning the call over to Lloyd to cover the financials, I want to touch briefly on one aspect of the final piece of our investment thesis, what we call option value. As you know, our firm has been focused in recent years on developing premier offerings in Artificial Intelligence. Because of the investments we have made, today, we have a robust AI services business across many civil, intelligence, and defense lines. We are proud to be helping organizations such as the Joint Artificial Intelligence Center and other parts of DoD overcome the hurdles in moving AI capabilities from the lab to the field. Warfighters are eager to operationalize AI in ways that will maximize efficiency, speed decision making, and improve command and control.

We expect continued strong growth in demand as more and more federal agencies work to integrate AI into their missions. This rising demand, and our capacity to meet it, is boosting growth on the services side of our business. And we are also developing new AI business lines and exploring ways to monetize our intellectual property. This is option value, because these new approaches have the potential to augment our labor-based business model with new revenue models and enhance our financial performance beyond the goals set in our investment thesis. On this front, Booz Allen will hit a significant milestone next week. Because of our strong partnership [Technical Issues], we will announce the limited release of an AI software platform at the NVIDIA GTC Conference next Monday. This is an early access prototype, with expectation that our production product release is about 12 months old. We do not expect a significant number of paying clients for at least a year. Still, this is an exciting step toward providing secure in-mission access to AI solutions for our clients. And we're optimistic about the potential it holds to fuel Booz Allen's future growth.

And with that, Lloyd, over to you for the full results of our quarter.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Thanks, Horacio, and good morning everyone. I'm excited to take you through the details of an excellent second quarter for Booz Allen. We came into the fiscal year planning for an aggressive first half, and that's exactly what we've delivered. Our ability to plan for potential market uncertainty and execute against a proven strategy gives us confidence that we'll deliver another fantastic year of growth. This confidence is reflected in our decision to increase the narrow full-year guidance for revenue and ADEPS, and to increase full-year operating cash guidance. Let's go through the numbers.

Please turn to Slide 6. Starting at the top line, revenue and revenue excluding billable expenses, both grew by 12.7% compared to the second quarter last year. The increases were primarily due to sustained client demand, three consecutive quarters of hiring and retaining phenomenal talent, and an extra workday compared to the prior year period. We believe our success and execution in hiring are supported by our unique market position and high-quality services. We are very pleased with the breadth and quality of the work we're winning, it's clear that demand for our solutions is diversified and that our strategy to be at the intersection of consulting, mission, and technology has made Booz Allen a valuable partner to an increasingly broad range of clients.

Turning to Slide 7. Book-to-bill for the quarter was in line with historical performance at 2.68 times and our trailing 12-month figure is 1.22 times, both excellent outcome supported by a strong award environment and robust proposal activity across all markets. Total backlog as of September 30th was $22.9 billion, 7.2% higher than the end of the prior year period and a new record high for our firm. Funded backlog at $4.4 billion increased by 4,8%. Unfunded backlog at $5.4 billion grew 12.3% and priced options increased 6.1% to $13.2 billion. Headcount, as of the end of the second quarter, was up by 1,640 or 6.5% year-over-year and, as Horacio said, by 600 since the end of June. Our success in hiring to date ensures that we can continue to execute on our backlog and meet our objectives for the second half of the year.

Moving to the bottom line. Adjusted EBITDA for the second quarter was $192 million, up 17% compared with the same period last year. Adjusted EBITDA margin for the quarter was 10.5%, up 38 basis points year-over-year. Our margin performance continues to be driven by strong contract performance, efficient management of our business, and an ongoing shift toward higher margin, technically focused work. We have become adept at translating industry-leading organic revenue growth into profit, even as we support our businesses and our people for the long term. As is our typical pattern, we do anticipate a lower margin in the second half than in the first due to seasonal increases in unallowable spending, the roughly flat growth in global commercial that Horacio mentioned, and other factors.

That said, we believe we will finish the year with EBITDA margins in the low 10% range. Second quarter net income and adjusted net income grew by 23.3% and 17.9% to $114.3 million and $114.8 million respectively. The increases are primarily due to revenue growth and margin expansion. This translated to a $0.13 increase in second quarter adjusted diluted earnings per share to $0.81. Our weighted average diluted shares outstanding declined 2.3 million shares compared to one year ago.

Turning to cash. We generated $216 million in operating cash for the quarter, bringing our total first half operating cash generation to $267 million roughly on par with where we were at the end of the first half last year. Additionally, due to the success we've had with the process improvements in cash collection cycle, we anticipate strong cash conversion during the second half, which gives us confidence to increase our full-year operating cash guidance. Capital expenditures for the quarter were $33 million as we continue to invest in facilities, infrastructure, and technology. This includes new secure and retrofitted space and technology to support an increasingly technical workforce, new business lines, and continued growth outside the Washington Metro area.

Please turn to Slide 8. Our strong operational and financial performance serves as the foundation for a patient, efficient capital allocation strategy that aims to deliver both near- and long-term value for our shareholders. Consistent with this approach, we returned $32 million to shareholders through dividends during the second quarter. We remain firmly committed to deploying our targeted $1.4 billion from fiscal year 2019 to 2021, in line with our investment thesis. Our capital deployment approach remains disciplined and our priorities unchanged. We continually evaluate all our options to ensure that we are maximizing the value of our capital for shareholders in the near, mid, and long term.

This morning, the Company announced the authorization of a 17% off-cycle quarterly dividend increase of $0.04. The quarterly dividend of $0.27 per share is payable on December 2nd to stockholders of record on November 14th. This off-cycle increase reinforces our commitment to quarterly dividend growth as a component of our investment thesis. As you know, our normal annual dividend assessment occurs each January. And we expect to do that assessment as usual this fiscal year. As I mentioned at the beginning of my remarks, our exceptional first half performance combined with our record backlog and strong headcount growth support our decision to increase the narrow full-year guidance.

Please turn to Slide 9. For fiscal year 2020, we now expect revenue growth to be between 9% and 11%, more than 2 to 4 percentage points above our original guidance due to the exceptional top-line performance and strong bookings in the first half. We also are raising and narrowing our full-year ADEPS guidance given our strong revenue and margin performance to date. The new range is $3 per share to $3.10 per share for the full fiscal year. This revised range is based on a $137 million to a $141 million weighted average shares outstanding and a tax rate in the range of 23% to 25%.

Finally, we have a $50 million increase in our guidance for operating cash. We now expect full-year operating cash to be between $450 million and $500 million. In closing, I'll reiterate that we are extremely pleased with our first half performance. We are executing exactly according to plan and we remain on a strong path. Heading into the second half of the fiscal year, the entire management team is excited about the success we continue to have and remains optimistic about meeting our multi-year financial goals.

Nick, let's open the lines for questions.

Nicholas Veasey -- Vice President of Investor Relations

Daniel, please open the lines.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Joseph DeNardi with Stifel. Your line is now open.

Joseph DeNardi -- Stifel -- Analyst

Yeah, hey, good morning.

Horacio Rozanski -- President and Chief Executive Officer

Good morning.

Joseph DeNardi -- Stifel -- Analyst

Horacio, I think when you guys provided the longer-term targets 18 months ago, they were generally more bullish than folks were expecting and you've now shown kind of halfway through an ability to have kind of multi-year visibility into your business. I'm just wondering if you could talk about how that visibility looks over the next few years in the context of a less bullish budget environment. I mean, I think that's the main focus of investors now in terms of can you all sustain this level of growth that you've been delivering. Maybe just talk about that a little bit. Thank you.

Horacio Rozanski -- President and Chief Executive Officer

Sure. Thanks for the question. We feel very good about the market that we're in. And, in particular, we feel good about the position that we have in this market. I think I've been consistent in saying that, for us, this is not about the overall size of the budget; it's about our clients who have the desire and the will to advance their missions especially through inserting [Phonetic] technology, have the means and the resources to do so. And they do, and we expect that posture to continue into the future and we expect that our differentiation will continue to carry us to being to leader in organic revenue growth, continue to allow us to then drop that to the bottom line through strong margins in the way that we have been doing it.

And we're confident that given the way our business is operating and our team is driving, that we see -- we believe the picture going forward is quite good.

Joseph DeNardi -- Stifel -- Analyst

Thank you. And then along those lines, I'm sure there was an assumption around bookings that was embedded in that three-year outlook. Can you just talk about, kind of halfway through, the extent to which bookings you've realized have been better than what you were expecting? Thanks for the questions.

Horacio Rozanski -- President and Chief Executive Officer

Our booking environment is actually quite strong. As you saw, and as Lloyd mentioned, we have record backlog to report coming out of the first half of this fiscal year. I think, again, at the risk of being boring, we've been very consistent in saying that we don't feel we're demand constraint, that we feel that our continuing challenge is to find the right people with the right skills, to deploy them into clients as quickly as we can to fulfill the backlog that's available. And that we've been doing particularly well certainly this fiscal year and we expect that to continue. So, it's a good picture and, again, we believe that we can operate in this market with quite a bit of confidence, which is why despite some of the current budget scenarios we have raised and narrowed guidance, we declare the $0.04 increase on our dividend off-cycle, our headcount is up 6.5% in the first half, just six months ago we increased the back-end numbers for our investment thesis projection.

I think these are all signs of confidence in the market and our capacity to succeed in this market.

Joseph DeNardi -- Stifel -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is now open.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hey, good morning everyone. Thank you for the time. And these results are never boring, Horacio. So, you're all good.

Horacio Rozanski -- President and Chief Executive Officer

Well, these are your headlines, Sheila.

Sheila Kahyaoglu -- Jefferies -- Analyst

In terms of -- Here's my first question on the headcount growth. It's growing pretty impressively, but still there is a pretty big delta between that and revenue growth. How do we think about -- Is that scope of contracts increased, is that just timing and it ramps in the second half? Can you talk a little bit about that?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Sure. Historically, if we are growing our headcount as planned, both sourcing and deploying the talent, there is a delay in getting those folks deployed and the conversion of what's in our backlog. So, as a rule of thumb, it typically is a few percentage points higher than what we see in terms of our headcount growth percentage, but historically, it's never been a one-to-one.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay, thanks. And then just maybe longer term, Horacio, you mentioned the AI adoption and just accelerating processes on that you don't expect any paying clients in the next year, but how do we think about that overall market size, the adoption of it, how quickly do you expect it? Can you just quantify it a little bit more, add a little bit of color on customers that you think are attainable?

Horacio Rozanski -- President and Chief Executive Officer

So, let me give you some color. We think about AI as both a key component of our traditional business, our labor-based business, and as a huge option-value type opportunity for the future. And we're seeing success on both of them. In the prepared remarks, I talked about our work at the JAIC. But that is one of the many places where we are working with clients to figure out how to both create AI solutions, but most importantly, take them to the field. A few months ago, we talked about a win at HHS on AI. This is a broad-based demand increase that we see across most of our clients who are looking to use these technologies to improve mission effectiveness in intelligence, in operational Intelligence for the military, and in anything that has a big data component, which at this point is [Indecipherable] of our federal government.

And we're seeing the near-term upside of that in our labor-based business. In parallel with that, we've been looking for different ways to monetize our intellectual capital and to take advantage of the fact that we know both these missions and what the mission needs are beyond what is purely labor-based, and this is what this software platform that we'll announce in more detail on Monday does as it gives our clients access to train models in a way that is in mission, that is secure, that they can actually bring to bear in different ways. That's the piece that has more of a longer-term tail to it. We're still in the pre-release limited access period, where we're working with a few clients to test the proposition to improve the proposition to advance it.

And about a year from now, we'll go into more of a full-production mode and then we'll begin to see, hopefully, revenues come from that. That's the path we want to be on. But you don't fit inside of these option value portfolio, which isn't one thing, it's a number of things. And at the right time, we'll come back and talk about what that whole group of initiatives looks like and what the potential financials for them are. It's premature to do that now, but it's certainly in our side.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you. Thanks a lot.

Horacio Rozanski -- President and Chief Executive Officer

Sure.

Operator

Thank you. And our next question comes from Cai von Rumohr with Cowen & Company. Your line is now open.

Cai von Rumohr -- Cowen & Company -- Analyst

Terrific, thank you very much. So, your bookings this quarter benefited from the $1 billion VA ITOPS task order protest that cleared. Could you give us some color in terms of how much do you have in protest of your take-away wins, and roughly how much are you protesting contracts that may have been taken away from you?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

In terms of protest, Cai, overall, as I said in the past, the environment is heavily protested environment. Now, that being said, for us, we've got minimal amount tied up in protest and on the other end of the -- other side of the coin, also a minimal amount of protest ourselves.

Cai von Rumohr -- Cowen & Company -- Analyst

Okay. And then you continue to look for a $1 billion foreign capital deployment. That looks to me like you've got to spend close to $700 million between now and the end of fiscal '21 on share repurchase or M&A. You didn't buy that much stock in the first half and your stock prices continued to go up. So, how should I think about the priorities you're setting on those two options?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Yeah, I mean, we are committed to returning the $1.4 billion through FY '21 and continue to look at all options; share repurchases, tuck-in M&A, our regular recurring dividend as Horacio mentioned, the fact that we did an off-cycle increase of $0.04 is in alignment with that, and the possibility of a special. But bottom line is, we remain patient, we're going to remain disciplined, we're always looking for what and how to maximize the value for our shareholders in the near, mid and long term, and we're in a great position. If you look at our operating performance and the strength of our balance sheet, which we've been working on for a number of years to make as strong as possible, we feel that being patient and being disciplined is ultimately going to return the $1.4 billion.

Cai von Rumohr -- Cowen & Company -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from Jon Raviv with Citi. Your line is now open.

Jon Raviv -- Citi -- Analyst

Hey, thanks, good morning. Maybe I'll just follow along there for a moment. The $1.4 billion you said 18 months ago was based on a certain set of numbers over three years. Clearly, those numbers are higher. So, directly asking, why just $1.4 billion higher?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

We've never straight-lined our projections. When we put forward the investment thesis, it really was to emphasize the growth in ADEPS over three years, as well as the top-line growth of 6% to 9%. We felt that providing more color around our capital deployment target, that would be good. And as we have also demonstrated in the past, where we see the need to make an adjustment, we'll make that adjustment. So we're not ruling out that it could be or not, but we do feel it's important to stay in alignment with the plan that we have, which we're very excited about this year.

Cai von Rumohr -- Cowen & Company -- Analyst

Appreciate that color, Lloyd. And then when you say tuck-in M&A, I understand what that means from a strategic perspective, perhaps. What does that mean from a size perspective, and is there a size on the patient [Phonetic] or what you could call a tuck-in?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Not really. I mean, we have always sort of reacted to what's the market making available to us, what are the broader financial implications of any particular deal. As I mentioned earlier, we're patient and disciplined. We look at over 100 opportunities every year, and given the strength of our organic growth, we don't need to buy revenue. And so, it is very much one of the levers that is at our disposal, just not one to-date that we've pulled a lot.

Cai von Rumohr -- Cowen & Company -- Analyst

Thanks very much.

Operator

Thank you. Our next question comes from Gavin Parsons with Goldman Sachs. Your line is now open.

Gavin Parsons -- Goldman Sachs -- Analyst

Hey, good morning.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Good morning.

Gavin Parsons -- Goldman Sachs -- Analyst

I wanted to ask you about just the growth and margin dynamics. Typically, with new contracts coming at a lower margin, faster growth often results in dilution. So can you talk about maybe whether anything has structurally changed, and if you could approach that from maybe a Booz-specific perspective but also from a customer standpoint. Thanks.

Horacio Rozanski -- President and Chief Executive Officer

Sure. I guess I'll start and then I'm sure Lloyd is jumping out a bit throughout.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Jumping!

Horacio Rozanski -- President and Chief Executive Officer

The dynamic for us is, our work through Vision 2020 has become increasingly more technical and increasingly more differentiated. And so we're on-boarding work that is at the center of our clients' missions, that is at the center of inserting technology into those missions in a different way, and that affords us actually in many cases better margins if not worst margins than what we have before. That was what we signed up to do through the investment thesis and that's I think what we've seen. That's why margins are up significantly. Frankly, ahead of our own expectations; If you go back 18 months ago what we thought we would do and what we're doing, we're better.

I don't know that I can comment on how the rest of the industry behaves. In large part, we've talked in the past about the fact that this industry was bifurcating and that we were looking to occupy this place of differentiation where clients need quality, where quality really matters, and where high-quality and high-impact missions gets rewarded.

And I think that's where we are. It allows us to enter this virtuous circle. Because of that, we can invest in new capabilities, we can invest in looking for and retaining the best people in this market, and it then in turn affords us the opportunity to continue to stay ahead.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

So I would just add to that. The 10.5 in Q2, we're ahead of where we were last year and 10.7 for the first half of this year. I think it really points to a couple of things. Certainly, what Horacio mentioned in terms of higher margin, technically focused work being at the center of our clients' mission. And it's working. There is a dynamic that when you look at the percent of our cost-plus increasing, that margin impact, which is typically a little bit lower, has really been offset by our just strong execution on fixed price and time and materials work. And we have been on a mission to operate increasingly at a higher and higher level, and our team and our people have done just that.

Gavin Parsons -- Goldman Sachs -- Analyst

That's great color. And then, Horacio, you talked about the shift to the software economy. Can you talk about how that expands your addressable market? I mean, for example, your approach to the soldier as a platform wouldn't have been possible previously. So, how does that open up new budget areas for you that had maybe previously been reserved for hardware? Thanks.

Horacio Rozanski -- President and Chief Executive Officer

It's a great question. I think the analogy that I would give; If you look at the car industry, right? I mean, the car I learned to drive on have exactly zero lines of code. It might have had a couple of wires. The car that I drive now is essentially on I-powered wheels. And the same thing is happening across defense, across intelligence. It -- Software is becoming the real source of value added and value creation; whether it's in space, on the ground, under water. And that's what we're seeing. And in that world, protecting that software and cyber security becomes a much bigger deal. Again, not just in the protection of networks, but in the protection of platforms. Analytics changes dramatically the way intelligence, both it gets collective and gets disseminated. And warfighting, changes. And this is the work -- I know, some of you, -- So, what we were doing at AUSA where, for example, we're creating data fabrics that allow multiple components agnostic as to who creates and to talk to each other so that a soldier on a visor can have the information that he or she needs from a satellite, from a drone, from an analyst; all coming into the same place. We're uniquely positioned to create those types of solutions. We're uniquely positioned to create open architectures at the edge and deny [Phonetic] the environment. We believe that this is why we're already winning. This is the pay-off period for Vision 2020. But this is how we're leaning into the future.

And I'm just talking now about defense any diligence; I could spend another 20 minutes telling you the same stories around fraud detection in Treasury and the Treasury area, about data and the value of data across the health -- the government health enterprise, about law enforcement, and the importance of all of those things.

So, this is a market that, I think, we've been preparing for. This market is here now, and we intend to capture as much opportunity as we can.

Gavin Parsons -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Carter Copeland with Melius Research. Your line is now open.

Carter Copeland -- Melius Research -- Analyst

Hey, good morning, gents.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Good morning, Carter.

Carter Copeland -- Melius Research -- Analyst

So, I was going to tease you for another conference call after a holiday, but then you delivered a treat on Halloween. So, I'll tell you just keep doing what you're doing.

Horacio Rozanski -- President and Chief Executive Officer

Well, it would have been worse yesterday because all of us match [Phonetic] plans; would have been a lot more tired. So...

Carter Copeland -- Melius Research -- Analyst

Yeah, yeah. I guess it worked out that way, but you did the Super Bowl and that was hard on Lloyd. So, just keep doing what you're doing.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Thank you.

Carter Copeland -- Melius Research -- Analyst

Look, just a couple for me. One, I don't know if you can share the color, but obviously, the civil growth year-to-date has been very strong and I wondered if that was attributable to -- I mean, you hinted at a couple of those things in the response to the last question, Horacio, in terms of law enforcement and treasury and the health enterprise and -- But I wondered if you might show us some colors on particular agencies where you may have seen that strength.

And then as a second question, just on the commercial side and the flat growth you talked about there. Is that just standard kind of lumpiness, or are there any geographic influences or particular sizable contracts there that did drive the kind of results you're seeing there? Thanks.

Horacio Rozanski -- President and Chief Executive Officer

Sure. Let me do the last one first, because otherwise I'll forget. In our global commercial business, we had a few contracts that wound down and that's what's driving the numbers this year. If you remember, back a couple of calls ago when we reported 32% annual growth in commercial, I, to be consistent, answered the same way. On the other side, which is a business of that size and of that maturity, a couple of contract going one way or the other; well, as you called it, lumpiness will drive the short-term performance, but the long-term drivers of that business, especially, our work in cyber remain very strong. We believe we're differentiated, and we're confident that it will continue to be accretive to our overall portfolio.

On the civil side, that is the business that has done well for quite some time. The anchor player for that business has been our Health business, which we talked about in some detail on Investor Day, as you'll remember, and which has been growing very well and continues to do so. Cai asked the question about ITOPS. That's again the type of win. It's not just the size of the business and the growth rate inside of it; it's that the business has really moved to the intersection of technology and mission. And whether it is cyber protection of a major health agency, whether it is our ability to do agile development at scale, whether it is helping them do fraud detection in a different way and now beginning to implement AI and Process Automation; those are all the drivers of growth. If you look at this year, again, health is growing very strongly; what we call our FED business, which is really Treasury and the associated agencies, is having a banner year; and our law enforcement and transportation business is also doing very well; which is why you get to the strong double-digit performance, which again, it's exciting in its own right, but it's the underlying drivers of it that have me excited and optimistic.

Carter Copeland -- Melius Research -- Analyst

Great, thanks for the color.

Horacio Rozanski -- President and Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from Edward Caso with Wells Fargo. Your line is now open.

Edward Caso -- Wells Fargo -- Analyst

Hi, good morning, congrats here. I'm a little curious as the market shifting more toward Tech and Solutions, is there a change in philosophy in dollars deployed around iRead? And also, if you could talk about your capex budget, the trends and what the forecast is for this year?

Horacio Rozanski -- President and Chief Executive Officer

We continue to do what we do on the front -- I'll take the first half of the question. Lloyd is better positioned to take the second half. On the first half, we continue to do what we began to do in 2012, when we formulated the Strategic Innovation Group, which is to lean forward into capturing positions in these new technologies, where we actually get to understand the technology, get to build partnerships with the external players oftentimes in Silicon Valley and beyond, and then bring that expertise and that knowledge to clients. So, that is an area of high demand and it's an area where we intend to continue. if anything, we're -- our success allows us to open the upper tier beyond the original things we talked about in 2012 to areas like 5G, laser communications, and a number of other topics that -- Again, at the right time we'll talk about in more depth.

But that's a core element of our play and whether it's done through iRead or through simply deploying seniors into understanding these technologies and being able to row more than on our clients, that's the game plan.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

And on the capex side of it, our capex expenditures are really aimed at continuing to support the growth we've been experiencing and to become more technical. Just as a context, we've been improving our facilities that allows us to source and bring on board the talent we want; allows us to work in a manner that's more collaborative, innovative; and then infrastructurally, really upgrade many of our IT systems, human capital, financial. We'll be consistent with that. We're likely to be around $120 million. That is at a level that we think will be consistent with the objectives around our capital expenditures.

Edward Caso -- Wells Fargo -- Analyst

My other question is around the continuing resolution. They're already talking of extending it beyond November 21. At some point, does that change your outlook if we roll on into next year with a CR or full CR? And then I guess the flip question, which is, if they miraculously get it done on November 21st, would you be more bullish about your second half? Thank you.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

I'll start. We're very excited to raise and narrow our guidance this fiscal year. And at the very beginning of this year, you'll recall, we forecasted that we wanted to come out of the gates very strong, aggressively. We did that. That was the right decision and at the same time, we said it was prudent to plan for some uncertainty in the back half. So, we had a more conservative approach. So, we've already taken into account as indicated at the beginning of the year and then with the raise and narrow and, as Horacio said, we believe that demonstrates our confidence through this year. So to the broader end of your question, we're going to address that when we get to a logical point this year.

We're just not at that point; we're very excited about where we are in mid year and we believe that the raise and narrowing of our ranges is indicative of that.

Operator

Thank you. Our next question comes from Robert Spingarn with Credit Suisse. Your line is now open.

Robert Spingarn -- Credit Suisse -- Analyst

Good morning.

Horacio Rozanski -- President and Chief Executive Officer

Morning.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Morning.

Robert Spingarn -- Credit Suisse -- Analyst

So, excellent quarter. Horacio, I wanted to dig into AI a little bit, and I wanted to ask if you could be a bit more specific in terms of what you're actually referring to; are we talking about, I guess, machine learning, computer vision? It just seems like a term that could be unpacked a little bit. And then maybe you could tie that into what you're going to be announcing at the NVDIA Conference, to the extent that you can talk about that. And then I have a question for Lloyd on margins.

Horacio Rozanski -- President and Chief Executive Officer

Sure. We are focused on really all aspects of making artificial intelligence operational inside a mission. And so this starts with building the correct infrastructure to be able to deploy algorithms in a way that if they work in the mission, as I've often said -- If you have an intelligence analyst that has to go way outside of their workflow in order to take advantage of a new tool that may not be fully tested, that may not be perfect yet; the chances of adoption are much lower than if that can happen inside their workflow. If you have people working out in denied environments, where they don't have access to communications, how do you put those -- how do you create the infrastructure so that the technology can be deployed at the edge.

So that's one aspect of it. The second aspect of it is the actual creation of both the platforms and the algorithms that actually improve these mission sets. And the final piece is how do you feel them, how do you actually put them in place, working with the operators, so that the algorithms themselves can be trained. I mean, this is dynamic technology, so it needs to be trained in the place where it's going to have impact to be fully deployed. How do you do that, and we're working through that entire chain with a number of clients that are at the leading edge on that. And that's -- that and more is the breadth of our work. In terms of the announcement on Monday, I'll ask you to just tune in on Monday and learn more then.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then Lloyd, we talked a lot about the margin momentum that's coming from mix. Today, we talked about the software economy. I guess, tied to what we just talked about a moment ago, are there also efficiencies dropping through? Or is that just not really the focus point here for margin expansion just in it? And what I think about is a variable-cost business, also with the tight labor market. So, is it really simply a mix-driven margin expansion?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

No. I mean, you're right. I mean, we have been focused on operating as strongly as we can. What we're experiencing now, which we also began to experience last fiscal year, is all of our change efforts to operate better and better are kicking in. And so, yes, for sure, there is the mix part of the business in what we do, which Horacio has talked about, but our business right now is operating very strongly.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Tobey Sommer with SunTrust. Your line is now open.

Tobey Sommer -- SunTrust -- Analyst

Thank you. Could you give us some color on your commercial business and to the extent that it would make sense to weave in your comments on AI, I'd appreciate that. Thank you.

Horacio Rozanski -- President and Chief Executive Officer

Our global commercial business, I have -- it's about 3% of total revenue. As you know, it has two significant components; one here in the U,S., one more focused in the Middle East, North Africa region. The core of that business, and the core of our strength, is taking our cyber expertise and know-how and deploying that to help, especially private sector clients, address the near- and longer-term issues that they face. Unfortunately, that is the business that is seeing a rise in demand and I say unfortunately because it's driven by the threat in the environment, which continue to increase and it's driven by adversaries who are more and more sophisticated. So, the people that our clients need helping them need to be equally increasingly sophisticated and Booz Allen, I believe, is at the top tier of that stack. And so that's the business that we're building. We're continuously evolving it. We're looking for places where cyber intersects with other technologies like 5G, like AI, like everything else. And I think that is going to be the continued source of differentiation for us.

Tobey Sommer -- SunTrust -- Analyst

Could you expand what performance was like in the quarter and then also maybe touch on in your headcount growth. Is there anything meaningful difference in the pace of headcount growth, or sort of junior staff out of school versus more senior lateral hires? Thanks.

Horacio Rozanski -- President and Chief Executive Officer

So, we're obviously very pleased with their performance in the first half across the entirety of the business and very pleased with the hiring and the retention in the first half of the year. This is -- Again, we had a playbook, which we shared with you early that our team has executed so far to perfection, which aims to try and get ahead of any potential uncertainty around the federal budget by hiring aggressively in the first half, by putting lots of people to work in the first half. And then that gives us the breathing room to then operate the second half as we see the environment evolve, while at the same time not just meeting our early commitments for the year but narrowing and raising.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

I would just add that we have probably four generations of folks at Booz Allen. Certainly at the more junior levels, summer internship programs, the changes that we've made there have really improve the yield of the candidates we see. But we have a tremendous effort and always will with sourcing and hiring at more senior levels, really driven by the requirements and needs of our clients. And at more senior levels, we also have an active recruitment under way. Just given their understanding of the various markets and the decision makers and the relationships they have.

Operator

Thank you. Our next question comes from Matt Akers with Barclays. Your line is now open.

Matthew Akers -- Barclays -- Analyst

Hey, good morning guys. Thanks for the question.

Horacio Rozanski -- President and Chief Executive Officer

Morning.

Matthew Akers -- Barclays -- Analyst

I wanted to touch on cloud briefly. So kind of with the jet I am moving forward, I mean, number one, when could that open up opportunities for you guys to build more stuff on top of the cloud? And then kind of on the flip side, are you seeing any indications that like the Amazons and the Microsoft for the world could use this to compete more directly with your business? like, are they hiring or competing for cleared personnel, for example?

Horacio Rozanski -- President and Chief Executive Officer

Let me answer the question holistically, which is cloud adoption is one of the major trends across that federal government, not in DoD. We expect that to accelerate and I think these contract vehicles are, in some ways, catching up to that demand as opposed to sort of being ahead of it. We work closely with all of the major cloud providers, because what they do we cannot do and vice versa. What we do is unique, is differentiated, and it allows cloud to be deployed into mission in a way that is successful and effective. And we believe that, at least for the medium term, those are the positions in the value chain that we and they will occupy.

So, we're bullish about the ability -- Again, a lot of what we talked about -- We spent a lot of time talking about AI on this call. You need a robust modern cloud infrastructure to deploy those kinds of capabilities. So, we see how the strong cloud adoption across the government benefits Booz Allen and it's another, I think, proofpoint on why we feel we're in the right place in the market at the right time.

Matthew Akers -- Barclays -- Analyst

Got it, thanks. And then I guess just going back to the long-term guidance, I mean, the 66% ADEPS growth. You're already kind of in the low threes this year, feels kind of conservative. How do you guys feel about that and could we get an update to that in the near future?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Yeah, I mean we're very excited about our performance to date and we never have straight lined our performance. But we have adjusted, as it makes sense. Halfway through this year, which is tracking exactly as we had planned, we've raised and narrowed our guidance and we're on track for another very strong year. As we get closer to the end of this year, we'll assess an update if we feel that there are any other metrics that need to be adjusted.

Matthew Akers -- Barclays -- Analyst

Okay, thanks guys.

Operator

Thank you. Our next question comes from Seth Seifman with JP Morgan. Your line is now open.

Seth Seifman -- JP Morgan -- Analyst

Thanks very much and good morning.

Horacio Rozanski -- President and Chief Executive Officer

Morning.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Morning.

Seth Seifman -- JP Morgan -- Analyst

I wanted to ask a little bit about the contract types. And I definitely appreciate that it's not contract type that dictates profitability, but the fixed price was kind of flattish year-on-year in the first half and up only kind of mid-single digits on a two-year basis. So, what, kind of, accounts for the mix shift in contract type as this growth has accelerated?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

It's fundamentally driven by the markets and the clients we support, as well as their preference as to what contract site they would like to engage Booz Allen. The increase in cost-plus is really driven by our defense market. It's been growing fantastically. That is the contract site that they typically turn toward, and we've been responding appropriately. As it relates to the fixed price, we typically see that in our civilian market and, obviously, in our commercial markets. We have a very conservative approach to the federal fixed price contracts. And so, I don't think there is really anything to read into it other than we're responding to our clients based upon their needs.

Seth Seifman -- JP Morgan -- Analyst

All right. Okay, thanks. And then as a follow-up, as you think about, sort of, moving to your next set of targets and capital deployment, do you still think of yield as kind of the right metric to look at? If you -- We saw the dividend increase today. If we saw another dividend increase early next year, it could still be kind of below the 2%, which is kind of a high-class problem to have, because it's the increase in the stock price that's driving it. But as you think longer term, is yields kind of the right target for your cash return strategy?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Yeah, I mean, when we put out our investment thesis originally, the 2% was really over time. So, we think we are deploying our capital in a prudent, patient, disciplined way. We're pulling the leverage that I mentioned earlier in the call. We feel that this is one that really, to your point, is somewhat of a high-class problem, but really speaks to the confidence that we have in our business and the returns that we can provide to our shareholders.

Seth Seifman -- JP Morgan -- Analyst

Great, thank you very much.

Operator

Thank you. Our next question comes from Louie DiPalma with William Blair. Your line is now open.

Louie DiPalma -- William Blair & Company -- Analyst

Good morning Horacio, Lloyd, and Nick.

Horacio Rozanski -- President and Chief Executive Officer

Good morning.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Good morning.

Louie DiPalma -- William Blair & Company -- Analyst

Cyber security, commercials, 5G wireless networks is a big steam right now since those networks are currently at the peak days of build out in the U.S. and around the world. Is that a new growth driver for you, or is the government leaving protection for those networks up to the wireless carriers themselves?

Horacio Rozanski -- President and Chief Executive Officer

I wouldn't put it as a single thing that we're focused on, but rather, as, again, part of this overall trend where technology is accelerating, where these platforms are changing rapidly, and where securing these platforms is becoming essential. It's broadly based and broadly known that the theft of intellectual property that our clients are dealing with; the issues around ransomware that our clients are dealing with; the issues that our clients face in terms of protecting defensive and offensive weapons platforms; space, a second-tested domain; cyber, a second-tested domain. To me, these are all of the kind than they all speak to both press and, for us, opportunities to serve, opportunities to add value to our clients, and opportunities to continue to honor skills and drive. Certainly, 5G is in that mix. But it is not, at least at this point, a singular area of focus. As I said, it is part of this overall picture.

Louie DiPalma -- William Blair & Company -- Analyst

Okay. So, it's not disproportionate above any of the other types of platforms they are protecting?

Horacio Rozanski -- President and Chief Executive Officer

Not at the moment.

Louie DiPalma -- William Blair & Company -- Analyst

Got you. And one final one. I'm digging deeper into your 12% top-line growth. Roughly how much of that growth is coming from, like, price inflation from your existing contracts as your existing contracts increase in scope versus new work that you're winning?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

It's probably be a challenge to get out at that specifically, but our win rate in Q2 was 62% for new work and 85% for a recompete. And that is up from the beginning of the year. And so that coupled with how we typically summit proposals with the right wage increases tied to our more technically focused work takes into account pricing as we see it at the time that we make a submission. So at this level, at my level, I'm very excited about our win rate performance and the top-line growth that that's been able to generate.

Louie DiPalma -- William Blair & Company -- Analyst

Okay. Lloyd. And when you're renewing contracts, is there a general, like price inflation, upon that renewal?

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

It varies based upon the circumstances. We, obviously, take that into account as we're putting together our pricing submissions. And the government has been receptive to that.

Louie DiPalma -- William Blair & Company -- Analyst

Sounds good. Thanks.

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Welcome, too.

Operator

Thank you. Ladies and gentlemen, that concludes today's Q&A. I'll now turn it back to Horacio for closing remarks.

Horacio Rozanski -- President and Chief Executive Officer

Thank you and thanks everyone. This has been a very robust Q&A session. If you'll allow me to close this morning, on a different note, I'd like to shift gears and call attention to something that we at Booz Allen are very proud of. Because earlier this month, at a special event, we celebrated the 20th anniversary of GLOBE; our internal business resource group for LGBTQ plus colleagues and allies. It's easy to forget, given the significant strides toward equality that our country has made in the past decade, how rare it was in the late 1990s for companies to provide benefits to domestic partners and their children or to establish an affinity group for gay and lesbian employees and their allies.

But that is exactly what Booz Allen did. And since then, we've consistently built on our record the support for equality, which is why our firm has scored a 100 on the Human Rights Campaign Corporate Equality Index since 2010. Our commitment to having every person at our firm come to work as their true authentic self matters. It matters a great deal. It matters to those we are recruiting, those who are new to Booz Allen, and those who've been here since the earliest days of GLOBE. And it's also one of the most powerful demonstrations of our purpose and our values. We firmly believe that the 105-year record of success for this institution comes down to people, to purpose, and to passion.

We take care of our people. We empower them to be their best selves and reach their full potential. That's where our focus was 20 years ago, when a courageous group of colleagues founded GLOBE, and it's absolutely where our focus will remain. So, I didn't want to let this anniversary pass without publicly acknowledging the GLOBE members, and all dimensions of our diversity are central to who we are and critical to our continued success. And on that note, thanks again for being with us on the call and have a great day.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Nicholas Veasey -- Vice President of Investor Relations

Horacio Rozanski -- President and Chief Executive Officer

Lloyd Howell Jr. -- Chief Financial Officer and Treasurer

Joseph DeNardi -- Stifel -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Cai von Rumohr -- Cowen & Company -- Analyst

Jon Raviv -- Citi -- Analyst

Gavin Parsons -- Goldman Sachs -- Analyst

Carter Copeland -- Melius Research -- Analyst

Edward Caso -- Wells Fargo -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Tobey Sommer -- SunTrust -- Analyst

Matthew Akers -- Barclays -- Analyst

Seth Seifman -- JP Morgan -- Analyst

Louie DiPalma -- William Blair & Company -- Analyst

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