Booz Allen Hamilton Holding Corp. (NYSE:BAH)
Q4 2016 Earnings Conference Call
May 18, 2016 8:00 AM ET
Curt Riggle – Vice President, Investor Relations
Horacio Rozanski – President and Chief Executive Officer
Kevin Cook - EVP and Chief Financial Officer
Lloyd Howell - EVP and Incoming Chief Financial Officer
Amit Singh – Jefferies
William Loomis – Stifel Nicolaus
Tim McHugh – William Blair
Edward Caso – Wells Fargo
Jonathan Raviv – Citi
Cai Rumohr – Cowen & Company
Michael French – Drexel Hamilton
Good morning. Thank you for standing by. Welcome to Booz Allen Hamilton's Earnings Call covering the fourth quarter and full year results for fiscal 2016. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions. I'd now like to turn the call over to Mr. Curt Riggle. Please go ahead.
Great. Thank you, Stephanie. Good morning, and thank you all for joining us for Booz Allen's fourth quarter fiscal 2016 earnings announcement. We hope you had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website, and are now on slide 1.
I'm Curt Riggle, Vice President, Investor Relations. And with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; Kevin Cook, Executive Vice President and Chief Financial Officer; and Lloyd Howell, Executive Vice President and Incoming Chief Financial Officer.
As shown on the disclaimer on slide 2, please keep in mind that some of the items that 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 fourth quarter and full year fiscal 2016 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 obligations 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 included an explanation of the adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter and full-year fiscal 2016 slides.
It's now my pleasure to turn the call over to Horacio Rozanski, our CEO, and he will start on slide 3.
Thank you, Curt. Good morning, everyone. Thanks for joining us. As Curt mentioned, on today's call, you'll have the benefit of the combined insights of our current CFO and our incoming CFO. I know several of you have had the opportunity recently to meet Lloyd. This call will serve as a transition point as Kevin wraps up fiscal year 2016 for us and Lloyd takes us into FY 2017.
I'll kick things off by connecting our strong FY 2016 performance to the broader market context and our long-term strategy to create sustainable quality growth. And after Kevin and Lloyd have discussed our annual results and guidance, I'll come back to discuss progress against one of our strategic elements in more detail.
For FY 2016, we are pleased to report that once again, we delivered in our top and bottom-line guidance. We beat the top of our revenue range and delivered strongly in the middle of our ADEPS range. I've always encouraged you to think about our financial results as building blocks in our strategic journey, and this call will be no different. Without a doubt, FY 2016 was a turning point in that our revenue began to grow after three years of contraction. We've had tremendous success in building our backlog which at $11.8 billion is a record for fiscal year-end. Our book-to-bill for the year at 1.45 is the highest annual results since the company went public.
Across the breadth of our client base, we saw work that aligns to our strategy, combining our traditional strengths and new capabilities and solidifying our role as an essential partner to clients. Both our core federal market and our global commercial business grew this year. We also made significant progress in reshaping our portfolio and increasing the percentage of professionals with high demand technical skills in our workforce. Skills like software development, analytics, cyber security and engineering. It is a combination of those skills with our superior consulting expertise in domain knowledge that creates for us lasting, differentiated, profitable positions in the market. It expands our relationship with clients and creates opportunities for our people to do truly meaningful work. Work at the center of our client missions.
One of the hallmarks of our firm has always been our agility. We look to read the market faster than others and make whatever adjustments are needed to deliver the quality and performance that clients and investors have come to expect. And that frankly we demand of ourselves.
We are now more than three years into transforming Booz Allen under our Vision 2020 strategy. As that transformation progresses, the market around us also continues to change. These dynamics in both the internal and external has reinforced the need to be agile in managing our business.
In FY 2016, we spend beyond our initial plans in order to take full advantage of available opportunities. The decision to do so was a down payment of the future and the results can be seen in our backlog especially the 45% year-over-year increase in price options.
In fiscal 2017, we will continue to pursue opportunities aggressively. But with a year of growth under our belt, we believe we can achieve success more efficiently. We do not intend to maintain spending at last year's levels which would mitigate the impact on our operating margins and cash position. At the same time, we are focused on increasing the revenue from direct labor by ramping up work on contracts and boosting billability. Hiring as always remains a top priority especially for those skills that are in very high demand.
On the strategic level, our aim for this year is to further operationalize our recent investments to drive growth across our markets. We have plenty of proof points that our strategy is working in the places where the implementation is furthest along. I will take you through two specific examples a little later in the call, but the overriding point is this. We are seeing growth in the areas where we expect to see growth and we intend to use past successes as model for future gains.
Our overriding objective is to deliver for clients comprehensive solutions that merge our unique mission insights and consulting know-how with new advanced technical capabilities. The best work, essential product network is accomplished at that nexus. It is also where we create the most value for clients which results to sustainable quality growth for the firm.
So, a lot more on this later, but first let me turn the call over to Kevin for a more detailed discussion of our FY 2016 results.
Thank you, Horacio. Please turn to slide 4. As we've noted throughout the year, FY 2016 represented Booz Allen's pivot toward growth. Over the course of the year we talked about it as an inflection point for the firm. A year that presented significant opportunities and an improved market. We turn the end of our largest IDIQ contract into a significant good news story by not only replacing but upsizing the ceiling associated with the replacement contracts and task orders.
We leaned forward by investing in growth and achieved our best fourth quarter book-to-bill in five years, our best whole year book-to-bill since our IPO and our largest year-end backlog ever. We are also very proud to have exceeded the revenue range and met the ADEPS guidance we provided last year at this time.
Our results affirmed that we have the right strategy for the future. And fiscal 2016 marked the turning point on the path of sustainable quality growth. I know you have all reviewed the earnings release issued this morning. I'd like to provide a little color behind the results detailed there.
First, when you look at the backlog, the type of work we're winning matters as much as the quantity. In FY 2016, we had a lot of success selling work that advances our Vision 2020 strategic objectives. It is aligned to clients' core missions and includes more technical content. While year-over-year funded backlog is flat, unfunded backlog in priced options are up 20% and 45% respectively, which gives us confidence about accelerating growth.
Second, a point about billable expenses. Billable expenses contributed to our revenue growth and applied modest pressure on adjusted operating income, adjusted EBITDA and adjusted net income. The FY 2016 uptake in billable expense was due in part to an increase in federal agency small business goals which led to greater use of subcontractors.
This increase in subcontractor cost accounted for approximately 20% of the annual adjusted EBITDA margin decline. Another driver of our results was indirect spending, which Horacio mentioned and we've discussed over the course of the year.
[Hiring] [ph] direct spending adds to the top line as a result of revenue recognition on cost-reimbursible contracts. At the same time, it negatively affects adjusted operating income, adjusted EBITDA, net income, and cash.
Some tax changes are also worth noting. During the year, our effective tax rate benefited from the passage of and our qualification for the federal R&D tax credit, the federal software development tax credit, and the other tax credits discussed during our third quarter call.
Our tax rate will benefit modestly going forward because several federal credits were made permanent or extended for five years. This benefit is already included in the estimated FY 2017 effective tax rate referenced in this morning's earnings release.
Specifically related to cash, we've said on our last call that our cash position would improve in the fourth quarter. Cash collections did improve but were offset by indirect spending. Our working capital needs therefore were greater than planned in the fourth quarter, and that drove the decline in cash from operations from the previous quarter.
Our CapEx spending for the year was as planned at about $67 million. The roughly $30 million increase from last year is primarily due to the reconfiguration of our facilities in the Washington metro area. The combination of increased CapEx and higher working capital needs resulted in lower free cash flow for the year.
We ended the year with total head count at roughly the same level as a year ago. As we've said in the past, what matters most to us is attracting and retaining the best people including those with skills in high-demand technical areas. On that front, we've made good progress. In fact, since 2014, we have seen double-digit increases in several of the skill sets aligned to our growth strategy.
Finally, as announced this morning, the company authorized a regular dividend of $0.15 per share payable on June 30th to stockholders of record on June 10. As always, the dividend payment is a reflection of our continuing confidence in the business and the progress we're making in creating sustainable quality growth.
With that, I'll hand it back to Horacio.
Thank you, Kevin. So, this is Kevin's last earnings call with Booz Allen. So, I want to take this opportunity to once again publicly thank you for your strong leadership of our financial organization, and your many contributions to the firm over a 23-year period. I'm particularly grateful for the continuity expertise and insight that Kevin provided during my first full year as CEO, and I know that he'll be missed by people inside and outside the firm.
I'll ask Lloyd, that's our Incoming CFO, to provide you with FY 2017 guidance today. I'm very happy that on recent weeks, many of you have had the opportunity to meet with him in person. I expect you've learned what I've known for a long time about my friend Lloyd that Booz Allen is extremely fortunate to have a leader of Lloyd's caliber. He'll bring a great mix of operational, strategic and financial expertise to the job, and he's already hit the ground running during the transition period. Welcome to the earnings call, Lloyd, and over to you.
Thanks, Horacio. We're now on slide 6. In FY 2017, we believe we can continue to capture demand and drive growth while executing the businesses with more efficiency in some areas. We will be agile in running the business, making adjustments as needed to land FY 2017 where we want to be at the top and bottom lines. We expect organic revenue growth to improve as we began to execute against our large backlog. At the same time, we will keep leaning into the market to win contracts and take share.
Profitability in our business remains strong in our margin profile, therefore, as primarily a function of both growth and spending needs. We do expect spending needs to subside in the coming year which would allow our adjusted EBITDA margin for the year to trend back up. Margins are expected to be relatively flat during the year, modestly higher in the first half than in the second half.
Relative to cash, in FY 2017, we're expecting a modest year-over-year improvement in cash from operations due to a reduction in spending on indirect activities and an increase in revenue. CapEx needs in fiscal 2017 are projected to remain at $60 million to $70 million, roughly the same level as FY 2016. As a result, based on our current expectations for the business, we should see adjusted net income to free cash flow conversion in the range of 90% to 100%. With of that all as context, our fiscal 2017 guidance is for gross revenue to increase in the range of 2% to 5%. At the bottom line, we expect diluted earnings per share to be a $1.60 to a $1.70 and adjusted diluted earnings per share to be a $1.65 to a $1.75.
Now, I'll turn it back over to Horacio and he is on slide 7.
Thanks, Lloyd. As is our custom, before we open the call out to your questions, I want to take just a few minutes to provide additional color on how our growth strategy is propelling us forward. You may recall that there are several main objectives of Vision 2020. We're moving closer to the center of our clients' missions. We're increasing the technical content of our work. We're attracting and retaining superior talent in diverse areas of expertise. We're creating a broad network of external partners and alliances and we're leveraging innovation to deliver differentiated end-to-end solutions to clients.
Today, I want to share with you some examples that bring the second objective to line. We're expanding the type of work we do for clients to include more technical content. This expansion is enabled not only by our recent investments in advanced capabilities, but more importantly, by our consulting heritage, our mission knowledge and the strong client relationships that we've established over many years. A first example is our work for the support of two federal agencies. The centers for Medicare and Medicaid services and the internal revenue service as they carry out their responsibilities under the patient protection on Affordable Care Act of 2010. You may remember that last summer we won a new five-year contract with CMS as the marketplace systems integrator. This gave us as a central role in helping the agency operate on extended capability of the federally facilitated marketplace, better known as HealthCare.gov. Throughout the fall and winter, we worked with CMS, other federal agencies, state governments, and insurers to manage the complex system of systems that make up the marketplace.
And during the open enrollment period, we manned a 24/7 operation center. From November through January, 12.7 million Americans selected the insurance plans were automatically reenrolled through the marketplace. The HealthCare.gov website ran without problems even as it handled more enrollments and users than ever before.
In FY 2016, revenue from this project was just under $36 million. We're already looking ahead to the next enrollment period and those that follow, working with CMS and other partners to improve the system even more. Similarly at the IRS, our work guide to implementation of the healthcare law began immediately after it pass, and has grown over the years from planning and program support to systems design and development, information protection, and cyber security. All told, it has generated more than $100 million in revenue. And based on the strength of our performance, we have expanded our systems delivery footprint throughout the agency.
Taken together, these projects demonstrate and will bring just the right combination of consulting expertise, mission understanding, and technical prowess to stay at the center of our clients missions and help execute one of top priorities for the entire federal government.
Another example of Booz Allen's growth strategy at work, of complementing our consulting heritage with greater technical content is our work for the United States Navy on the West Coast. The Navy has been our longest client. We've been serving the Navy for longer than any other client’s organization. More than 75 years. And we've provided a range of services from acquisition program management and logistics to IT support and strategic communications. Under Vision 2020, we have augmented our West Coast business in particular by adding to those traditional strengths. We're taking new capabilities in engineering, analytics, systems delivery, digital, and cyber to both new and existing clients.
We have focused on expanding our work for SPAWAR headquarters. It's part of our acquisition organization program executive office for C4i under West Coast naval and warefare centers which includes SPAWAR Systems Center Pacific and five separate surface, air, and under warfare centers both in California and Washington State.
Revenue across those clients grew to $122 million last fiscal year that's up 40% from two years ago and the work is spread across many contracts in the past quarters. For example, when SPAWAR headquarter was named the navy's technical authority for information technology and information assurance a few years ago. Our acquisition program managers worked together with our cyber security experts to put together a winning proposal.
We are now the prime contractor for cyber and information assurance, currently our first option here on a 5-year $65 million contracts. The evolution of our West Coast navy business represents a fundamental strengthening of portfolio manage out of San Diego. Our people have done a great job positioning the firm for sustainable quality growth for years to come and the results are showing already.
Headcount in what we call the San Diego cluster of offices is up 25% since 2014 and two-thirds of those hired in the past two years have advanced technical skills.
As we look to accelerate growth in FY 2017 and beyond, these successes and others like them serve both as proof points of our strategy and models that we can replicate in other parts of our business. Projects like these are significantly robbing our clients' understanding of what Booz Allen can do for them. They're fueling sustainable quality growth for our firm.
With that, Curt, I think we're ready to move to Q&A.
Great. Thank you, Horacio. So, Stephanie, at this point, can you please provide the instructions for the Q&A portion of the call?
[Operator Instructions] We ask that you please limit yourself to one question and one follow up. Our first question comes from Amit Singh with Jefferies. Your line is open.
Hi, guys. Thank you for taking my question. Congratulations on a great quarter. Just wanted to start off with a little bit more color on the market environment, and how that ties up to your guidance? I mean, historically you guys have generally come towards the higher end or beat your top line guidance in any given year, I mean, fiscal 2016 being an example as well. So, what is baked into the lower end of your revenue growth guidance and the upper end of your revenue growth guidance related to the end market? Is it safe to assume that if the market continues on the current trend, the upper end of the guidance seems more likely?
Let me talk about the market, and then just let me give you the broader point on guidance, so we don't trap ourselves here a little. First of all, the market environment, as we see it, for the types of services that strategically we're positioning for continues to be strong. The demand signal for being at the centers of our clients' missions for bringing in the solution-oriented differentiated work is actually exciting, and on that basis, we grew, and on that basis, we are expecting to grow even faster in FY 2017. I think that to me is the key point. The market out there is still very uncertain. We're heading into an election cycle. There's a lot of movement. But our clients have gotten particularly adroit at making sure that their priorities, the key priorities in their mission get funded first. And because we are positioning closer and closer to those, we believe we can continue to capture a strong demand environment even as things are on move. But like I said, it's uncertain like I said in the script we are trying to stay very agile within a strategic framework to take what the market will give us.
So, within that, I don't think any of us want to handicap the guidance beyond what Lloyd have said. We think we will operate in that range. Where exactly? I think the year will tell. I think the key is we are looking to grow. We're trying to grow faster in FY 2017 than FY 2016 if we can. But we will remain agile and we'll remain smart as the market evolves.
Just to add to Horacio's comment, we're going to continue to control our costs. So, with that management, we're also expecting a boost in the revenue from [direct] [ph] labor. As you saw and heard from Kevin, our pipeline remains strong and the market is still signaling demand. So, we intend to continue investing in key areas, aggressively going after the opportunities that will drive out additional revenue growth in the future.
Okay. Great color. And just on one of your earlier comments, Lloyd, about spending will subside a little in fiscal 2017 versus fiscal 2016. So, as you look at your set of margins in 2017, should we expect them to come closer to the 2015 level?
We have seen continued growth or continued strength in our contract profitability and length. And though we spend aggressively in FY 2016 to capture and record that level of backlog, we're going to work to control that spending. Our available expenses were higher in 2016, and we expect the slight continued increase in 2017. But we don't see that impacting our margins negatively.
We'll continue to lean into the market, and we believe we can become more efficient as you heard from Horacio. So, our reduced spending, our higher billability are expected to support adjusted EBITDA margins trending back upward with a relatively flat profile quarter-to-quarter.
All right. Perfect. Thank you very much.
Our next question comes from Bill Loomis with Stifel. Your line is open.
Hi. Good morning. Good quarter. Just looking at the consulting head count which was down year-over-year, you talked about how you had a record amount of award, highest awards in five years then highest this year since the IPO and that – what's in your backlog right now is higher technical content, better quality if you will. Why are we not seeing consulting head count grow? And how can we expect to see that? What shall we look for particularly as we get through the summer higher period on consulting head count? Thanks.
Hey, Bill. Let me start and then I am sure Lloyd and maybe Kevin will want to weigh in on this as well. I think when you look at FY 2016. We probably expected to see more head count growth in the second half than we have, but as I said before, you got to take what the market gives you and the way in which the market laid out, we manage to achieve our revenue growth with the head count that we have. I think, for the year, the key for us and you'll hear more about this later is we're strategically focused on the types of work that is sustainable long term, that creates sustainable quality growth. And we're focusing our workforce on that as well. And we're going through in FY 2017, tried to remain agile, and once again, both be strategically focused but also follow the market at a tactical level to capture as much growth as we can the right way.
I think given the managing costs, we're looking to make sure billability is right. And so, I think you'll see head count increase throughout the year, but it'll increase more in the second half than the first half is the way I would think about it.
The only points that I would add is that this dynamic that we're seeing is consistent with our growth strategy. We've increased by 6% the number of people with technical skills in our workforce over the last two years. And we're confident given the nature of our backlog that this will continue. I think the examples that Horacio ran through in the script around our software development, in our architecture team, that group alone has grown by almost a third over the last two years. And then, our cloud analysts and data scientists have grown by almost 40%. So, the complexion of our workforce continues to be in alignment with our strategy, and we're seeing, for those areas that represent the technical skills that we like to attract, we're seeing nice growth rates there.
Okay. And then you talked about you expect to have lower investment, I guess, relative to revenues. So, less impact on margins over the next year. What's the key reason for that? I mean, obviously with the fiscal 2016 budget money flowing this year, we expect – and you talked about a much higher pipeline. Should we expect higher business development or is it just that now what you did last year in covering those expenses so it's less of a burden on margin but that investment is continuing to go up? Thanks.
Well, I think there are a couple of dynamics. One is that for the workforce that we have, we've raised the billability percentage to convert and to continue on the work that we have. We're looking to redeploy the workforce that we have to those high demand areas in our portfolio. And with, as I said in my opening comments, with where we do see higher returns of the investments we made, we'll continue to lean into that. For areas that we did not see having the return that we sought, we'll reduce that. So, with the management of the portfolio, balancing both the business development with the actual deployment of our staff, we think that's where we will achieve the margin improvement.
Okay. Great. Thank you.
Our next question comes from Tim McHugh with William Blair. Your line is open.
Excuse me. Yes. Thanks. Just a quick numbers one first. The other income – I apologize if I missed this, but kind of $5 million gain. What was that this quarter?
Hey, Tim. It's Kevin.
It primarily relates to a through-up of some of the assumptions we made in purchase accounting related to recent acquisitions. On the normal course, we have things that move around every quarter, whether it's tax or other income or whatever.
Okay. And then just on the, I guess, the commercial side, especially with Lloyd, since that's your – some of your historical focus. Can you elaborate, I guess, on how that – you said it did well for the quarter, but I guess, any more color there as well as kind of how you think about that in 2017?
Sure. Our global commercial business continues to grow double-digit rates, I think, 24% for last year. So, we're very pleased with the trajectory that it's on. And more importantly, we're pleased on the nature of the work that we were able to capture in the market which is based on a cyber-set of offerings and then expansions off of that. So, – in North America, in our various regions, we're very happy with the way that is progressing.
Can you just – what's the status of that end now relative to the total?
Our next question comes from Edward Caso with Wells Fargo. Your line is open.
Hi. Good morning. Did I – I'm trying to understand your hiring comments. So, should we interpret your response to Bill that your utilization is rising here, that you're sort of getting a little more bang out of your workforce. And does that mean you've already made whatever adjustments you need to in the skilling of those people as your mix of revenue changes?
I will start with this. It is, Bill – I mean, Ed, what's happening is the work is changing as we get closer to the clients mission as we get more central as we increase the technical work. We expect that trend to continue. We expand those skill sets to continue to grow significantly. We are seeing modest increases in billability but most increases in billability have significant impact on our revenue line and our margins, and that's been the focused over the last couple of months. The focus of the next couple of months. Having said that, we remain aggressive in the market in terms of hiring the people that we need. We are finding and bringing on and retaining the right kind of skill sets, and I expect that to continue and if our growth projections as they materialize, we will have to increase head count to ensure that we have the right people to serve our client in the right ways. So, that's – I'm not sure if that's what you heard in our commentary about bill but that's what we were trying to say.
Okay and just to help us out here. Can you give us a range on adjusted EBITDA for fiscal 2017, just so we can get our math right? EBITDA margins.
Well, I think about what we – what Lloyd said earlier [indiscernible] is that we expect it to trend upward. I think Amit was trying to lock us down as to whether we – back to FY 2015 or maybe it was one of the other questions, levels. And we're not committing to them at this time, but certainly, we do believe with the way we're going to manage the business in FY 2017, and it will trend higher than it was in FY 2016.
Right. Thank you.
Our next question comes from Jon Raviv with Citi. Your line is open.
Hi. Good morning. Everyone. On the sales growth. can you talk a little about the drivers between organic end markets, the [indiscernible] and also the how much is coming from the SPARC acquisition, please? And then, in that context, do you still believe that growth can further accelerate in each of the years ahead as you suggested before?
I'll take a shot. This is Kevin. First of all, we don't break out SPARC revenue. I mean, we said when we acquired the company it was really from a gross revenue perspective, somewhat immaterial. So, we don't break it out. Although I will tell you that it is growing, and we expect it to grow further in FY 2017.
The other parts of your question relate to things that could transpire to drive accelerated growth. And I think that's dependent on the selling season coming up here this summer into September as well as Lloyd and Horacio both talked about converting the backlog that we already have through increased billability and hire additional staff.
Let me make a strategic point which is that we have invested significantly in our business over the last three or four years in our innovation agenda, in our global commercial business, in the new capabilities that are allowing us to extend and deepen what we do for clients like in the examples you heard around the ACA implementation and around San Diego. And we are seeing great returns from those investments. And it's really on that basis that we believe that we will grow in FY 2017 faster than in 2016 and in 2018 faster than 2017 and so forth.
It is – obviously, there's a mathematical element underneath that. But strategically, like I said, we are seeing the return in the growth rate of the investments that we have made. And we believe, as those continue to mature and materialize that will propel both great opportunity and great growth because it is allowing us to do work that our clients are demanding in a way that, quite frankly, I don't believe anybody else in this market can do.
Great. Thanks. And on free cash flow conversion, one, I think you talked about 90% to 100% next year or in FY 2017. How do you feel about the business going forward? Is that a normalized rate, or is this all like 120%-ish kind of free cash flow conversion type of business?
We don't see it as the way you phrased the question. I mean, we are expecting modest year-over-year improvement in our cash from operations that will result from the lower indirect spending and increased revenues. So, our CapEx needs in 2017 are going to remain largely at the same level as last year. And we'll continue to reconfigure – as we continue to reconfigure our D.C. area facilities to support our strategy. After that, it's expected to revert to about 1% of revenue because of the reconfiguration that will be done. So, that has led us to the belief that the conversion is going to be in 90% to 100% range for the fiscal year, and not 120%.
But the structure going forward?
I'm sorry, say it again?
Sorry. The structure going forward? I'm thinking about just the long term, is this business, say, 100% free cash flow conversion type business, or what are you thinking?
We're thinking that it will be a 100%-plus modestly over the course of the year.
Our next question comes from Cai von Rumohr with Cowen & Company. Your line is open.
Yes. Thank you very much. So, billable expenses were considerably up in the fourth quarter as a percent of sales. Maybe tell us as you look at fiscal 2017, what is your assumption about billable expenses and give us some color as to why you're assuming what you're assuming?
Hi, Cai, it's Kevin. You're right. What's up in the fourth quarter? And actually up for the entire year substantially. Well, that's driven by the – some of the changes in the small business subcontract that we are required to do. We don't expect to see that type of step function increase again in FY 2017. So, the good news there is that it shouldn't have any downward pressure, material downward pressure on our `adjusted EBITDA margins.
And to put it on context, the billable expenses, I think, in FY 2015 were about 26.6% of revenue and they're about 28% FY 2016. It is on some of the larger procurements with [indiscernible] partners and things like that. We're delivering solutions that will be probably at consistent level of subcontractors going forward. But again, nothing – we don't expect to see another spike.
Thank you. And then, Lloyd, you mentioned commercial which is still very, very small, was up 24%, maybe give us some specifics in terms of the relative growth of the other three businesses and as you look at fiscal 2017 I assume you're still looking at commercial double-digit, but what should the relative growth rate of the other three markets be? Thank you.
Well, as I've been counseled, we don't give percentage growth in a way that you've asked the question, but when we think about commercial and international, we are planning on a continued double-digit rate of growth or those businesses. The demand and backlog is running in parallel to what we're seeing on the federal side. The relationships with our major clients are deepening and we are continuing to grow the head count in those businesses as well. So, as it relates to commercial international, we continue to see that becoming a greater contributor to our overall portfolio going forward.
Let me expand on that by saying that we expect next year the growth picture to be stronger across all parts of our business, and that is the key point, but the point that Lloyd made is important from an agility perspective. We want to make sure that we have the ability to capture growth where the growth is which is why we're not trying to either guide or give details about specific segments. We are going to be as smart hopefully as we've always been in terms of shifting resources and shifting teams to the opportunities as they present themselves. That's been a hallmark of this firm. That is why we outgrow the market and the competition and we have every intention to do that next year as well.
[Operator Instructions] Our next question comes from Michael French with Drexel Hamilton. Your line is open.
Thank you. Good morning, everyone. And congratulations on securing a year-over-year growth for fiscal 2016. One element of the strategy for continuing that growth in 2017 have been to increase the bid size and the question is, does that still hold given what you had to say this morning about increased focus and emphasis on technical bids?
It does. We – as Horacio has said in previous calls, I mean, we remain true to being the essential partner to our client. And in some cases, that is representative in a larger bid. So, our strategy is to be the essential partner, getting close as we can to our client's mission. We have seen that percentage of the portfolio increase. But I would caution against that. We're pivoting to that solely being the strategy.
We will pursue as best as anyone to capture that work. And as you heard in the CMS example, we've been successful in doing that. But, again, it's to be close to the client's mission first. And if that leads naturally to larger solicitation, then we're going to take a shot at it.
Okay. And the final could be a number of other firms have talked about going after bigger bid. And has that materialized in increased competition in the market that you've noticed? And if so, how are you responding to that?
I'll start. The competition in the market remains as frothy as it's ever been. I would offer, though, what we are seeing by many of our clients in their decision-making process is that they are seeking more so value-based support than in previous years. But across the board, the competition remains pretty intense.
I'll agree with that. It's a very competitive market. I think our approach – I won't comment on what other people are doing. What I will say is we are not trying to change revenue for revenue's sake, and we're not going after bids just because they're there. We are more focused than we've ever been about shaping our portfolio, and capturing the work that we believe leads to long-term sustainable results where we can do work for clients that the clients will appreciate us differentiated, and where ultimately, our people, will both love their work and be passionate about it. Because it's really an intersection of all of that that we believe we can create this growth path that we're interested in, the profit path that we're interested in, the financial results that you're interested in, it all comes together from that. And if anything, FY 2016, when you look at the backlog picture, the numbers are impressive, but what's inside of them, if we could have the time to go piece by piece, would be even more impressive because it is the type of work that we're describing, and it's allowing us to focus more and more on being our clients' essential partner.
Horacio, if I could just add a couple of specifics. Many folks in the call realize that we have many, many contracts and past orders throughout the year. So, adding large ones can have a positive impact. I'll bring to mind the $937 million five-year global threat contract we won last September. Two recent wins in the news have been a $400 million single award for the Defense Intelligence Agency, as well as $180 million award from the U.S. Forestry Service. So, all of those are larger procurements that we might have seen historically. So, they're out there, but we're not going to stop serving our clients in whatever they need done, whether it's $1 million task order or $100 million contract [indiscernible].
Thank you. I appreciate your response.
Our next question comes from Cai von Rumohr with Cowen and Company. Your line is open.
Yes. Thank you for the follow-up. So, SPARC I guess that gives you more capability and agile software. Can you talk a little bit about you're kind of M&A thinking going into the year and whether there are opportunities for additional agile software acquisitions in different geographies.
Sure. As you probably head from Kevin in previous calls. We remain pretty picky when it comes to mergers and acquisitions, in large part because our strategy has led us to the view that we are best at identifying opportunities where we can build upon the capabilities preferably in the growth areas that we've already invested in and expand from there. So, as a result, acquisitions like SPARC are make a lot a of sense given our strategy particularly in the area of business development agile specifically.
Our pipeline of opportunities are very much consistent with that line of thinking. So, whether its systems development, cyber security, or analytics, data analytics, these remain our priority areas and they will, hopefully, yield, over time, opportunities that will allow us to build upon the capabilities we've already began to invest in.
Thank you. I’m showing no further questions. I will now turn the call back over to Horacio Rozanski for closing remarks.
Thank you very much. Thanks everyone for your questions and taking for time to be with us this morning. I hope that Kevin, Lloyd and I did justice to the pride and optimism that we feel about FY 2016 performance and our FY 2017 guidance, our position in the market, our future direction. The almost 23,000 talented professionals of this firm are serving our clients exceptionally, and therefore, expanding our business into exciting new areas. It is on the strength of their performance that this institution is once again growing.
We look forward to building on that momentum in fiscal 2017 and in the years beyond. Thanks again.
Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect. And everyone, have a great day.
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