Prepared remarks
Good morning, and thank you for being here. Welcome to Booz Allen Hamilton's earnings call discussing the results for the second quarter of Fiscal Year 2026. I will now hand the call over to Dustin Darensbourg, the Head of Investor Relations.
Thank you. Good morning, and thank you for joining us for Booz Allen's Second Quarter Fiscal Year 2026 Earnings Call. We hope you've had an opportunity to read the press release 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 financial results are Horacio Rozanski, our Chairman, Chief Executive Officer and President; Matt Calderone, Executive Vice President and Chief Financial Officer; and Kristine Martin Anderson, Executive Vice President and Chief Operating Officer. As shown on the disclaimer on Slide 3, please note that we may make forward-looking statements on today's call which involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings 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. 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 2026 earnings release and slides. Numbers presented may be rounded and as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on Slide 4.
Thank you, Dustin. Welcome, everyone, and thank you for joining today's call. This morning, Kristine, Matt, and I will share our financial results for the second quarter of fiscal year 2026. The key point of our discussion today is that the reacceleration of our business will take longer than we anticipated during last quarter's call. As a result, we are reducing our top and bottom line guidance for the year. This decision is based on ongoing challenges in the procurement environment and notably different dynamics within our civil and national security sectors. By national security, I refer to our increasingly integrated defense and intelligence operations. Despite these short-term challenges, we continue to see strong performance in our most promising growth areas, which fuels our optimism for the medium term. Shortly, Matt will provide a detailed review of our quarterly results and explain how they differ from our original expectations. Before that, I want to outline the market conditions, how they affect our business in different ways, where we see growth emerging in the near and medium term, and the strategies we are implementing to compete successfully in this environment and position ourselves for long-term strategic and financial success. Starting with the market, this is the most fragmented environment I have observed during my decades at Booz Allen. Our civil and national security sectors are experiencing entirely different dynamics, and we believe that both face varying prospects in the upcoming quarters. Our civil operations are currently navigating the toughest market challenge in a generation. Over the past nine months, the changes in civil agency funding priorities have unfolded at an incredible pace. As we indicated in May, this has resulted in baseline reductions in some of our major technology contracts. Since then, the business base has stabilized, and we've witnessed some growth in certain areas. Nevertheless, the procurement environment and our near-term opportunities in the civil sector have not rebounded. Typically, our second quarter is the most active since it coincides with the end of the government's fiscal year. This year, we observed no major procurement actions, nor were there significant increases or decreases in existing contracts. Additionally, we did not experience the usual pace of tactical sales. Given these conditions, we anticipate a delay in our return to growth in the civil sector by several quarters. When this happens will depend on the evolution of funding and contract activity. In response, we are engaged across all government levels in discussions regarding potential opportunities that align with the administration's top priorities, from critical minerals to border security. These discussions are promising and have the potential to yield results. There are also several significant RFPs in our growing medium-term business pipeline, including new work and recompetes. Looking ahead, we plan to leverage our AI capabilities and commercial technology partnerships to transform our delivery methods and reignite growth in the civil business. The conditions in our defense and intelligence sectors, broadly referred to as our national security portfolio, are fundamentally different and considerably stronger than those in the civil sector. Although there is some friction in the funding process, marked by shorter funding cycles and slower ramp-ups for new contract wins, the pace of awards in our national security portfolio has been encouraging. Of the $7.2 billion in gross bookings this quarter, approximately 90% were in national security. This includes almost $1.2 billion in a task order where Booz Allen will assist the Air Force Research Laboratory in enhancing combat effectiveness through the adoption of advanced technologies. We also secured three additional significant awards valued at over $800 million each, including a competitive win with the United States Army National Guard's Intelligence and Security Directorate and two contracts with the Defense Intelligence Agency, which involve modernizing military intelligence and delivering new AI/ML capabilities for critical global missions. Booz Allen continues to excel in national security due to our exceptional technology and extensive mission expertise. Broadly examining our national security work, our leadership in cybersecurity, AI, and war fighting technologies is highly relevant to government technology and mission priorities. Our cybersecurity business is increasingly differentiated, and our Thunder Dome product is setting the standard for Zero Trust. We achieved all government milestones two years ahead of schedule and recently won the 2025 Cybersecurity Breakthrough Award. We also remain the largest AI provider to the federal government. As cybersecurity, AI, and new hardware and software converge, we are developing the technology that positions Booz Allen as an industry leader at the forefront of technology. Some of you had the opportunity to observe our edge technology at AUSA and our recent investor event. From our modular detachment kit to attack solutions and our advanced tactical gear, we are integrating our own technology with top commercial products to empower and safeguard our nation's armed forces. As we examine this year and beyond, we expect to see top-line growth in our national security portfolio along with the potential for increased margins as we shift toward fixed-price and outcome-based products and solutions. Upon reassessing our entire portfolio, we did not observe the normalization of the procurement and funding environment that we initially anticipated. I am disappointed in our results this quarter and in our decision to lower guidance across all key metrics. The strength of our national security portfolio is unable to offset the decline we are witnessing this year in our civil business. This has prompted us to reevaluate our market assumptions and take bold and significant actions immediately. We are well-equipped to navigate a highly fluid and dynamic environment moving forward. Numerous opportunities lie ahead, such as funding aligned with the administration's key priorities, the acceleration of AI adoption across the federal government, and the increasing momentum in converting contracts to new models. However, there are also obstacles, including the government shutdown, a decrease in the acquisition workforce, and ongoing adjustments to civil agency priorities. Booz Allen's goal is to remain focused and agile in this environment so we can leverage the clearer growth opportunities in our portfolio, especially in areas where we maintain technology and mission leadership. To achieve this, our strategy encompasses three key goals. First, we are reducing costs by accelerating AI usage in our internal operations and simplifying our operational model. We are also making the difficult choice to reduce layers and positions in our senior management ranks. These actions will enable us to continue investing in our priority growth sectors and streamline decision-making. Matt will explain the impact and timing of this program shortly. Second, we are concentrating our investments by focusing on our strengths. This involves directing investment and talent toward specific areas where we are currently seeing strong growth and that we believe can be further accelerated. Our main focus areas for the near term include cybersecurity in both government and commercial markets; artificial intelligence, with an emphasis on growing areas like Agentic, physical and adversarial AI; war fighting technology, particularly in edge technologies and mission systems; crucial national security programs, specifically expanding our efforts in supporting the warfighter both domestically and internationally; tech ecosystem partnerships, including existing collaborations like NVIDIA, AWS, and Shield AI; and new concepts with leading companies in Silicon Valley. We will also maintain a strong emphasis on emerging technologies from Quantum to AI-native 6G. Booz Allen is poised to lead in upcoming technology waves. Third, as the administration accelerates the transition to outcome-based contracting and commercial solutions, Booz Allen is at the forefront. We are collaborating with our customers to convert existing contracts and secure new projects using these innovative models. We are diligently working to productize many of our offerings, such as our groundbreaking ground systems and fire control solutions proposed for Golden Dome. These strategies will deliver greater cost efficiency and reliability for our customers and present us with margin expansion opportunities as we gain flexibility in our delivery methods. I believe that these combined efforts will broaden our market leadership in key areas, expedite the implementation of our VoLT strategy, and importantly, enhance our financial performance. In summary, we are taking bold steps in the aspects we can control. Every period of difficulty has strengthened us, and this one is no exception. We are transforming ourselves rapidly, and I am fully committed to ensuring that Booz Allen plays an essential role in advancing America's technological leadership. I remain optimistic about our company's future. Now, Matt, it's over to you.
Good morning, and thank you for joining us today. As mentioned, our business performance remains split. Our second quarter results and updated guidance for the fiscal year reflect this situation. In many areas of our business, we are seeing real momentum, and we have several reasons to be optimistic about our medium-term financial outlook. Notably, significant parts of our business are expanding and are well-positioned for continued growth. We expect that our national security portfolio, which includes our Defense and Intelligence sectors, will see revenue growth in the mid-single-digit range for the full fiscal year. In the last quarter, we secured $7.2 billion in new contracts, including four programs valued at over $800 million within our national security portfolio. We are committed to developing the technology our country needs while rapidly expanding our network of commercial tech partners for innovation. We have the capacity to adjust our cost structure to meet immediate demand, ensuring our competitiveness and providing the resources needed for future investments. Furthermore, our balance sheet is robust, and we are generating substantial cash flow, which is a key strategic and financial advantage. However, we faced more disruptions in the first half of our fiscal year than expected, particularly in our civil operations, due to several factors. First, changes in government are leading to longer procurement cycles. New initiatives are taking more time to kick off, and funding is being released in smaller amounts. Although the pace of contract funding improved during the second quarter, it still lagged behind last year by 3%, resulting in a 6% decline in our funded backlog year-over-year. Second, while our civil business has stabilized and we have not seen any adverse contract actions beyond those mentioned in the first quarter, there is a significant gap in civilian procurement. We expect pricing pressures on larger procurements, particularly with some notable recompetes. Consequently, we now expect our civil business revenue to decline in the low 20% range for the fiscal year. Third, given that our civil operations have a larger share of fixed-price contracts, which historically have yielded higher profit margins than Booz Allen overall, the shift away from civil work is pressuring our margins in the near to medium term. Lastly, the ongoing government shutdown has added another layer of complexity to our operations, which we anticipate will modestly negatively affect our revenue and profitability for the fiscal year. Echoing earlier comments, we previously indicated that our fiscal year 2026 guidance depended on a normalization of the funding environment, particularly in the second quarter. While funding did increase at the end of the quarter, especially in September, the overall pace remained considerably slower than in previous years. As a result, our business did not accelerate as forecasted, and we now believe that a return to growth will take a few more quarters. In light of these factors, we have revised our fiscal year 2026 guidance downward across all key metrics. Our updated outlook assumes that current trends in funding and procurement will continue through the end of the fiscal year, thus leading to slower growth in contract and new award bookings compared to prior years. We are not satisfied with this year's performance, and we are implementing substantial actions in response. Our focus moving forward will be on three main areas: enhancing growth in sectors with significant potential, collaborating with our clients to adopt more commercially oriented outcomes-based approaches to purchasing our solutions, and restructuring our operations to achieve a net annual cost reduction of $150 million. We have identified the areas for these reductions and have already begun implementing changes, which will provide a modest benefit to this fiscal year's bottom line, with full effects expected next fiscal year. We believe these initiatives will help restore our margins to historical levels in fiscal year 2027, although there may be a slight negative impact on revenue from our cost-plus contracts. Importantly, these steps will also allow us to continue investing in key technologies and talent, enhancing our competitiveness and agility in response to market demands. These decisions are significant and require genuine effort. Some have long been planned, while others are challenging but necessary during this period of rapid change. Collectively, these steps align with our VoLT strategy and long-term vision for Booz Allen, positioning us for an exciting new phase of growth and delivering superior value to our shareholders. Now, let’s delve into our second quarter results. For this quarter, gross revenue totaled $2.9 billion, down 8% from the same period last year—about a 9% decline when excluding billable revenue. Adjusting for a one-time reduction in our provision for claim costs from last year, gross revenue decreased by approximately 5% year-over-year. Within these totals, our market performance varied. The national security portfolio of defense and intelligence programs continues to grow. This segment increased by 5% year-over-year, excluding discrete items from the previous fiscal year, and we expect it to continue growing in the mid-single-digit range for the full fiscal year. Conversely, revenue in our civil business fell by 22% year-over-year, also excluding prior year discrete items, and we anticipate a decline in that sector's revenue in the low 20% range for the full fiscal year. Moving on to demand, we had a strong sales quarter in terms of both volume and quality, particularly considering the challenging macro environment. Total gross bookings reached $7.2 billion in the quarter, including four awards in our national security portfolio worth over $800 million. However, these were partially counterbalanced by two specific items: one typical and the other seasonal. During the quarter, we recorded approximately $1.1 billion in contract ceiling reductions, primarily related to fiscal year 2028 and beyond, arising from our collaboration with the new administration on identifying future cost-saving opportunities, particularly as we transition to more outcome-based contracting. We view this as a nonrecurring event that minimally impacted our ongoing contract run rate. Additionally, around $1.3 billion of backlog expired during the quarter, which is routine and aligns with historic Q2 trends. Consequently, our net bookings for the second quarter were $4.8 billion, resulting in a quarterly book-to-bill ratio of 1.7x and a trailing 12-month ratio of 1.1x. Excluding the out-year ceiling removal, the book-to-bill ratio was slightly over 2.0x for the quarter and 1.2x for the trailing 12 months. Total backlog at the end of the quarter stood at $40 billion, reflecting a 3% year-over-year increase. Funded backlog grew by about 34% sequentially to roughly $5 billion, although it was down 6% year-over-year. At the end of Q2, our qualified pipeline for the rest of fiscal year 2026 was nearly $25 billion, which is consistent with the prior two fiscal years. To summarize, we are observing solid demand signals in a market that is currently bifurcated. We remain confident that as the macro environment stabilizes and we focus on our proven growth vectors, Booz Allen will be positioned for a return to growth. Now regarding headcount, we concluded the first half of the fiscal year with about 33,000 employees. Our customer-facing staff decreased by roughly 3% sequentially in the quarter and is down 10% year-over-year. These reductions are primarily due to ongoing adjustments from contract run rate reductions in our civil business and intentional efforts to enhance staff utilization. We are managing our business efficiently, with customer-facing staff utilization significantly exceeding the prior year's levels. Operationally, we continue to align our workforce with our key growth areas, including ramping up hiring in critical mission and technology sectors. We are actively recruiting in important areas of our business to support new wins and growth opportunities. Turning to profitability, we achieved $324 million in adjusted EBITDA during the second quarter, down 11% from last year, leading to an adjusted EBITDA margin of 11.2%, 40 basis points below the same period last year. For the first half of the fiscal year, our adjusted EBITDA margin was 10.9%. We expect margins to decline in the latter half of the year due to three factors: the timing of contract write-ups and award fees, seasonal spending habits, and a continued shift away from our civil sector. However, this decline will be somewhat offset by the partial impact of our cost restructuring actions and our shift to outcome-based sales. Moving further down the profit and loss statement, our second-quarter net income was $175 million, down 55% from the previous year. Adjusted net income was $183 million, reflecting a 21% decrease from last year. Diluted earnings per share fell 53% year-over-year to $1.42, while adjusted diluted earnings per share decreased by 18% year-over-year to $1.49. The declines in diluted earnings per share and adjusted EPS stemmed from four factors: reduced overall profitability, an unrealized investment gain and tax planning benefitting the prior year's quarter, as well as higher interest expenses. These were partly offset by a reduced share count compared to the previous year. Shifting now to the balance sheet, it remains strong, enabling us to be proactive and agile in allocating capital for shareholder value creation. We ended the second quarter with $816 million in cash, net debt of $3.1 billion, and a net leverage ratio of 2.5x adjusted EBITDA for the trailing 12 months. Our free cash flow for the quarter was $395 million, which was generated from $421 million in operations minus $26 million in capital expenditures. Regarding capital deployment, we utilized a total of $279 million this quarter to create shareholder value. This included $208 million in share repurchases at an average price of $107.15 per share, representing nearly 2% of outstanding shares. We also distributed $68 million in quarterly dividends and made $3 million in strategic investments through Booz Allen Ventures. We are pleased to announce that our Board of Directors has approved a quarterly dividend of $0.55 per share, payable on December 2 to stockholders of record as of November 14. Additionally, the Board has increased our share repurchase authorization by $500 million, bringing our total available capacity to about $880 million as of September 30. Lastly, please refer to Slide 7 for our outlook. As previously discussed, our initial fiscal year 2026 guidance was based on the assumption that the funding environment would normalize. While we did see increases in funding and awards through the quarter, the overall pace remained significantly slower than previous years. Consequently, both our top line and bottom line performance for the second quarter fell short of our expectations, leading to a reduction in our fiscal year 2026 guidance across all key metrics. We now project revenue between $11.3 billion and $11.5 billion, adjusted EBITDA margins in the mid-10% range—which corresponds to an adjusted EBITDA dollar range of $1.19 billion to $1.22 billion—and adjusted EPS of $5.45 to $5.65 per share. We also anticipate free cash flow to be between $850 million and $950 million. As we adjust our growth projections for the second half, we now expect current funding trends to persist through the end of the fiscal year, leading to slower growth in contracts and new award bookings compared to previous years. Additionally, at the midpoint of our revised guidance, we have factored in a loss of approximately $30 million in revenue and $15 million in profit due to the government shutdown, based on the assumption that it continues through October 31. While our guidance does not include this possibility, if the shutdown extends through November, we estimate the impact will remain within a similar range, barring significant changes in government scope or Booz Allen policies. In conclusion, our market is bifurcated, and funding levels have not normalized as we anticipated. We are disappointed with our performance this quarter and the resultant need to lower our guidance. Nonetheless, we are successfully securing substantial new programs, particularly in our national security portfolio, and are satisfied with our growth trajectory. We are taking significant immediate actions to adjust our cost structure as we prepare to accelerate growth and profitability. We are focusing on key growth sectors where we are seeing real momentum, notably in cyber, artificial intelligence, war fighter technology, and critical national security programs. Our objective is to ensure Booz Allen is well-positioned for improved performance in the upcoming fiscal year and beyond, and we are confident in our ability to achieve this.
Questions and answers
Our first question comes from Louie DiPalma at William Blair.
Given the shutdown in your high exposure to the federal civilian agency, many investors were anticipating a guidance reduction. Horacio and Matt, you both used the term bifurcation several times and you also mentioned how funding in the month of September was actually consistent with last year's September. I'm drilling into that, are you receiving signs and indications that the funding environment for the defense and intel business is actually improving and getting back to normal? Or is this funding environment expected to be strained for your defense and intel business even after the government restarts and the shutdown?
Thank you for the question. The concept of bifurcation is significant as we assess the business. As I mentioned earlier, our civil operations are facing the toughest market conditions we've seen in a generation. To illustrate what Matt pointed out regarding the funding gap, we observed that nearly all procurement timelines have shifted significantly, which is unprecedented. Moving forward, we are not so much trying to predict the future as we are aiming to respond to the immediate challenges ahead. In contrast, our national security segment operates in a much more favorable environment, although there are still obstacles due to the government shutdown, which has delayed processes. The specifics of any continuing resolution will also influence this situation. Despite our considerable wins, we do not expect a rapid increase in activity; rather, we anticipate the growth will be slower than historical trends. Thus, our discussions today emphasize that while friction remains, it should not hinder our growth trajectory. To navigate this effectively, we must remain agile and focused. Being nimble involves not attempting to forecast long-term but responding to medium-term shifts as swiftly as possible. The cost measures Matt mentioned are part of this strategy, aiming to secure our finances and enhance our ability to invest and adapt pricing quickly, as well as streamline our operations for greater efficiency. I'm particularly enthusiastic about our cyber business and the rising demand for our AI capabilities, both in government and commercial sectors. Our recent war fighting tech day showcased some of our key national security efforts and strengthened our partnerships within the tech ecosystem, allowing us to tap into new opportunities and improve our go-to-market strategies. Overall, while we are dissatisfied with the latest results and the revised near-term guidance, this reflects our current view of the market landscape.
For the remainder of the year, the civilian guidance indicates a negative 21%. What are the assumptions regarding the government shutdown and potential cuts to existing programs? Are you assuming other programs will be reduced? Investors want to know if there will be further cuts to the federal civilian business and if this situation will continue indefinitely. What gives you confidence that this will be the last guidance reduction for the civil business?
Yes, I'll start, and then Kristine may want to provide some color as to what's happening in the Civil business. As we said in the prepared remarks, we didn't actually see any actions positive or negative in civil last quarter. So we didn't see any additional cuts. We also didn't see any plus-ups or new awards and new procurements and what have you. So if you look at our civil portfolio, outside of a number of large programs that we've talked about, that portfolio is going to be essentially flat, both at the top and the bottom for the year. I think which just sort of indicates sort of the state of where we are in many of those agencies. But those large programs matter, and that's why we're guiding down to in the low 20% range at the top. So we aren't anticipating any further cuts. We are anticipating a very competitive procurement environment with some pricing pressure, particularly on the large program side. We also are having great conversations with folks in the administration about some of our key priorities. So we've used the word stabilized in civil, and that's what it feels like, but stabilized after a fairly significant run rate on our pretty large programs in an environment where things just aren't moving very quickly. But Kristine, I'm sure you want to chime in there.
Thanks, Matt. Yes, the business is stable, as Matt mentioned. The environment remains slow with very few new large bids and not much increase in funding. This seems to reflect the administration's reevaluation of how they want to approach some of those missions. The work we do in civil is technically impressive and aligns with administrative priorities. For instance, we have one of the largest implementations of Agentic AI software in the world, and we are leading in that area. We expect work to grow there again, and we are having productive discussions with administration leaders about new approaches to core missions. We're integrating commercial solutions with our intellectual property and outcome-based commercial offerings, but it's challenging to predict exactly when these will start. As Matt mentioned, we are assuming the current status will continue through the rest of the year, but we do foresee growth in the medium term.
Thanks, Kristine. Was there stabilization in the Civil business from the September quarter compared to the June quarter?
I'd say, yes. Yes, it's been pretty steady since the reductions that we had a while back in the year.
Yes. It has been stable, which means there were no new declines, but we also did not observe the expected on-contract growth in increases and the usual pace of tactical selling in Q2.
Yes, when we discuss bifurcation, another way to look at it is that there are always both upside and downside across all of our business. Currently, there seems to be more downside potential in the civil business and more upside potential in the national security business. However, these situations can change rapidly. Our approach is to direct resources and investments toward opportunities as they arise, without being tied to a specific outlook, ensuring that when growth opportunities present themselves, we take full advantage of them.
It comes from the line of Sheila Kahyaoglu with Jefferies.
I have two questions. The first one is about the short-term and the broader picture. Previously, you mentioned that the civil portfolio has margins around 13%, which suggests that defense and intelligence are in the 8% to 10% range. Is that still an accurate way to assess the profitability for those customers?
Yes, that's in range, Sheila. We never quantified it that way, but we've talked about how Civil has a significantly higher proportion of fixed-price contracts. So that's roughly in range.
Okay. Got it. And then maybe a bigger picture question, Horacio, for you. How do we think about the business model for Booz longer term, just given pendulums clearly shift and maybe 3 years from now, it will shift back where we're scrubbing our models for national security exposure and saying Civil will grow again double digits? So how do you think about aligning the sales force and the workforce and your management team as you restructure the business a bit?
One of the key features of our operating model is that we function under a single profit and loss statement, which allows us to quickly respond to market changes without arbitrary restrictions. This has always been the case. Each time an administration changes, they reassess their priorities. As I mentioned earlier, this current shift may be the most significant I've witnessed. However, we will keep leveraging our extensive reach to pursue available opportunities. Additionally, I believe that the evolution of technology has led to a trend of integrating commercial technology into missions, favoring outcome-based models over input-based ones. These major trends are expected to persist moving forward. While they were already in motion, the administration's renewed focus has served as a catalyst. I do not anticipate a reversal. This is why we have invested considerable time, effort, and resources in establishing partnerships with both large tech companies and small startups with innovative technology. Our position within this technology ecosystem provides us with a long-term advantage that we are just beginning to realize. Right now, we are pursuing several opportunities, including one in the civil sector and a few in national security, which would be unattainable without the strong partnerships we've formed with these companies. As more people recognize Booz Allen as a builder of technology that also utilizes the innovations of others to deliver solutions, our influence in the market will continue to grow.
It comes from the line of Colin Canfield with Cantor Fitzgerald.
It seems that there might be some downside related to the cost structure of the business. As we begin planning for 2027, if we expect Civil to decline by about 10% while Defense and Intelligence grows at a moderate rate, our calculations suggest organic growth could range from 0% to 2%, with the potential for acceleration in 2028 from that starting point. So, first, does that overall assessment sound accurate? Second, are you able to achieve growth next year? And third, if not, when do you anticipate the business will begin to grow again?
Yes, thanks, Colin. Look, I think a couple of things. One, as we talked about, we had a lot of momentum in our national security portfolio. Two, the civil business is stable, right? And unfortunately, we saw a significant decline in the first half of this year. But obviously, our comps will get proportionately easier given where we are. I'm not going to get into next year. We got a lot of medium-term optimism. There are some significant building blocks. As Horacio said, the nature of this market is such where things are happening fast. And we've got some exciting opportunities in the fire. So I would not necessarily straight-line the math exactly how you did, Colin, but I'm sure we have in this conversation over the next couple of quarters.
I would add that, as we discussed the growth strategies, it is clear that the national security market is showing stronger potential. We expect these growth strategies to be particularly effective there. Additionally, we are exploring various opportunities in areas like cybersecurity and artificial intelligence, as well as technology that is highly relevant to border security, large event security, and the upcoming World Cup. We are actively looking to expand in segments of our civil business that align closely with the administration's priorities, and we intend to pursue this vigorously.
Colin, if I could just jump back in here. Two other thoughts for you. One is we are seeing an increasing pace of contract conversion to outcomes based. While small, the portion of our national security portfolio at fixed price did increase quarter-over-quarter, and that's certainly the direction of travel and in part because of that, but also other dynamics. I do think going forward, our growth will be not as linearly connected to head count growth for a handful of reasons. If I can just give you a couple. The vast majority of our FTE loss this year was in Civil, and that's where we have more of our fixed-price contracts. And that revenue is not as 'headcount' dependent. Second, we're driving up utilization. And then third, the mix shift that I just described. So I understand we've had a fairly stable business model and that's relatively easy to model for you externally. Those dynamics are changing, consistent with the kind of pace of change that Horacio was talking about, and we'll continue to engage with you over the coming quarters.
So the margin trough this year is expected to improve over time, and that's my main takeaway. I recognize that the businesses have performed well on a quarter-to-quarter basis, but if I were to consider an investor's perspective, what would you fundamentally say to an investor thinking about going short next quarter? What reasons would you give to indicate that this might not be a wise decision?
The business is providing investment advice, Colin.
Our next question is from Mariana Perez Mora with Bank of America.
When you guys think about the new guidance, I'd appreciate some color around like how much is already in backlog, how much you have to go and like win and is still depending on like some contracts that could be delayed? Like could you give us some kind of like measure of how strong is that backlog coverage and also the pipeline and like if you have like any amount of like how that pipeline appears to a year ago or something?
Yes, Mariana, we expect that the current burn rates and trends will largely continue, and headcount will remain mostly flat, barring the cost reduction initiative we mentioned. This outlook isn't heavily influenced by any significant new wins. However, we do need some growth from existing contracts and a few other factors for our projections to materialize. In our current guidance, we believe that no substantial changes are required for us to remain within this range, though it is a volatile situation.
And you mentioned on contract growth. How is your conversation with your customers right now about like certainty about like them needing that kind of growth or still like there is a lot of uncertainty if that's going to happen or where it's going to trend?
I'll begin and I'm sure my colleagues will want to chime in as well. We are having very constructive discussions, particularly regarding national security and the growth areas we have mentioned. For instance, we anticipate continued growth for ThunderDome, which has established itself as both a standard and a sought-after product. We expect to see some growth in that area. Additionally, we are observing a notable increase in various other segments within national security. As Matt indicated, we have not made overly optimistic assumptions about the second half of the year, acknowledging the challenges posed by the current environment, including ongoing shutdowns. We have factored these conditions into our planning. However, we are also as proactive as ever in our efforts to push forward despite these obstacles. This reflects our current mindset.
I would add that the administration really wants to push speed in some areas. So those conversations are extremely productive. And so that continues as well.
So you mentioned cyber, and the expectations were for that portfolio to actually grow like at speed. How large is that right now? And what do you expect for that portfolio? Again, like the near term has been volatile, but in the next like 2 to 3 years?
I am very optimistic about our cyber business for a couple of reasons. First, we occupy a unique position in the national security space that is well recognized within the government and represents a significant strength for us. Second, I always talk about convergence. When considering the impact of AI and Agentic on cyber, there are a few key points to note. The attack surface has expanded because the AI models have grown and are now becoming potential attack surfaces themselves. Additionally, adversaries are using cyber more effectively by incorporating AI, necessitating that defenses adapt accordingly. Furthermore, we are seeing widespread interest from our commercial customers, who are facing numerous cyber threats and recognize us as a key player in helping them navigate these challenges. Unfortunately, cyber risks are pervasive and continue to increase. I believe Booz Allen has one of the most powerful cyber businesses in the world.
Our next question comes from Gavin Parsons with UBS.
I just wanted to unpack the disconnect between awards and funding a little further, if we could. Is total backlog still a good leading indicator of demand and growth?
Yes, looking at the long term, short-term funded backlog is important. Our funded backlog decreased by 9% year-over-year in Q1 and 3% year-over-year in Q2, resulting in a 6% decline for the first half. This indicates that while the funding environment has improved, it has not fully normalized. There is a lot of variability currently, and as Kristine mentioned, we are seeing shorter funding periods that come in less predictable increments. This means it is not as straightforward as it used to be. Nonetheless, larger awards will drive growth. We have a pure recompete, a recompete with an increased ceiling, a new award, and a takeaway. Therefore, we are not as confident about a quick ramp-up as we have seen in the past, and we have incorporated that into our guidance, but backlog is still very important.
And our last question comes from the line of Tobey Sommer with Truist.
Could you discuss your process for determining how much growth investment to allocate and how you balance that against where you were targeting near-term profitability and head count cuts that's sort of a tight rope and there's tension there? And maybe you could discuss how you arrived at your decisions?
I will begin by saying that, as previously mentioned, we do not run this company with a focus on the short term. Our management strategy is centered around medium and long-term goals. We are making investments that we believe are wise for both immediate profitability and essential for long-term growth, benefiting both revenue and profit margins. This approach has always been our philosophy, and it remains the case now. We are currently making tough decisions about implementing significant cost reductions to ensure we can perform well in the short term, particularly with an eye on fiscal year '27, while also retaining the flexibility to invest in areas with the most potential. This is what makes Booz Allen Hamilton exciting. I can share insights about current growth areas, short-term growth opportunities, and initiatives like Quantum and AI-driven 6G that I believe will contribute to future growth. It is crucial for us to maintain this momentum while also recognizing the work needed to enhance our short-term financial results.
We find ourselves in an interesting position as we are disappointed with our performance and guidance. However, when I examine our portfolio, I see more demand and investment opportunities for medium- and long-term growth than I have seen in quite some time. As acknowledged by Kristine and Horacio, the environment is incredibly dynamic, with this administration advocating for change. There are significant opportunities not only in the U.S. government but also in the commercial sector and with similar allies. This is part of the internal discussions that lead us to take tough actions to free up $150 million in costs, as we recognize these investment opportunities. We are focusing on the growth areas we have mentioned, and the potential for real opportunity is a key factor driving our cost actions, rather than just achieving short-term financial results.
If I could ask another question on SIML. Amid a once in a generation change to the top line and demand, do you assume that the margin holds because it's relatively unusual for significant sort of TAM changes not to be accompanied by margin compression?
Yes, that's a great question. I mean, overall, yes, but there is competition for price that we're expecting because there'll be fewer bids, there will be more bidders, there will be much more aggressive pricing. But that's at the same time that we are able to use a lot more technology to innovate how we deliver, which would still preserve margin.
Thank you. And this concludes our Q&A session for today. I will pass the call back to Horacio Rozanski for concluding comments.
Thank you, everyone, for joining us today. I hope this discussion gave you a deeper understanding of the factors that underlie our performance, how we see the market, how quickly we are responding and our reasons for optimism about the future of Booz Allen, which include both our leading position in advanced technologies by how we apply them to critical missions in a way that we build things that work, our agility, our willingness to move fast and our capacity to invest and accelerate our growth vectors. And really, most importantly, the people of Booz Allen and the quality of our team, which continues to be extraordinary and it's a source of optimism for all of us. And so together, we are moving forward, and we want to accelerate both our mission impact and our financial performance, and we are focused on doing so. Thank you again, and have a great day.
And thank you. And this concludes our conference. Thank you for participating, and you may now disconnect.