Q1 2024 Leidos Holdings Inc Earnings Call
Operator: Greetings, and welcome to Leidos' first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode.
Greetings and welcome to the lighter first quarter 2024 earnings conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Please note. This conference is being recorded at this time I'll turn the conference over to Stuart Davis from Investor Relations Stuart you may begin.
Operator: A brief question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis from Investor Relations. Stuart, you may begin. Thank you, operator. And good morning, everyone.
Stuart Davis: Thank you operator, and good morning, everyone.
Stuart Davis: I'd like to welcome you to our first quarter fiscal year 2024 earnings conference call. Joining me today are Tom Bell, our CEO, and Chris Cage, our Chief Financial Officer. Today's call is being webcast on the Investor Relations portion of our website, where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call. Turning to slide two of the presentation, today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, includes risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Stuart Davis: I'd like to welcome you to our first quarter fiscal year 2024 earnings conference call.
Stuart Davis: Joining me today are Tom <unk>, our CEO and Chris <unk>, our Chief Financial Officer.
Stuart Davis: Today's call is being webcast on the Investor relations portion of our website, where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call.
Stuart Davis: Turning to slide two of the presentation. Today's discussion contains forward looking statements based on the environment as we currently see it.
Stuart Davis: And as such includes risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Stuart Davis: Finally, as shown on slide three, during the call, we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Tom Bell, who will begin on slide four. Thank you, Stuart. And good morning, everyone.
Stuart Davis: Finally as shown on slide three during the call, we will discuss GAAP and non-GAAP financial measures a reconciliation between the two is included in today's press release and presentation slides.
Stuart Davis: That I will turn the call over to Tom Bell, who will begin on slide four.
Thomas A. Bell: Thank you Stuart and good morning, everyone. It's very good to be with you again today and I'm thrilled to report a very robust start for light us in 2020 for a substantial raise to our full year guidance and some additional details around the purposeful steps, we're taking to position lighthouse.
Thomas A. Bell: It's very good to be with you again today, and I'm thrilled to report a very robust start for Leidos in 2024, a substantial raise to our full year guidance, and some additional details around the purposeful steps we're taking to position Leidos for an awesome future. The Leidos team got out of the starting blocks impressively this year, addressing our customers' most vexing challenges with passion and pace, and as a result, delivering an excellent quarter of top and bottom line results. First quarter revenue grew 7.5% year over year, all organic. First quarter adjusted EBITDA margin was 12.3%, a record for Leidos, and year over year, non-GAAP EPS grew 56%.
Thomas A. Bell: Awesome future.
Thomas A. Bell: The <unk> team got out of the starting blocks impressively this year addressing our customers most vexing challenges with passion and pace and as a result, delivering an excellent quarter of top and bottom line results.
Thomas A. Bell: First quarter revenue grew seven 5% year over year all organically.
Thomas A. Bell: First quarter adjusted EBIT margin was 12, 3% a record for lighthouse.
Thomas A. Bell: And year over year, non-GAAP EPS grew 56%.
Thomas A. Bell: These results demonstrate that our new capability-based organization is unlocking significant value across the company. With good cash generation, as promised, we began our 2024 stock buyback program by repurchasing $150 million worth of shares on the open market during the quarter. You'll remember that during our last earnings call, I framed our initial 2024 guidance against the backdrop of a very good year for Leidos in 2023 and a very uncertain 2024 customer budget environment. Happily, since then, the House and Senate have passed appropriations for the entire federal government.
Thomas A. Bell: These results demonstrate that our new capability based organization is unlocking significant value across the company.
With good cash generation as promised we began our 2020 for stock buyback program by repurchasing $150 million worth of shares on the open market during the quarter.
Thomas A. Bell: Youll remember that during our last earnings call I framed our initial 2024 guidance against the backdrop of <unk>.
Thomas A. Bell: Very good year for <unk> in 2023, and a very uncertain 2024 customer budget environment.
Thomas A. Bell: Happily since then the house and Senate have passed appropriations for all the federal government.
Thomas A. Bell: And now, with funding in place, our customers have the resources and direction they need to confidently execute their mission. With that certainty in our customers' budget, the quick success of our organizational realignment, and our team's strong start to the year, we have increased confidence in our near-term growth prospects. As such, we are significantly increasing our 2024 guidance and now expect to far exceed our previous multi-year financial commitment. Chris will detail our new 2024 guidance later in the call.
Thomas A. Bell: And now with funding in place our customers have the resources and direction they need to confidently execute their missions.
Thomas A. Bell: With that certainty in our customers' budget. The quick success of our organizational realignment and our team's strong start to the year, we have increased confidence in our near term growth prospects.
Thomas A. Bell: As such we are significantly increasing our 2020 for guidance and now expect to far exceed our previous multi year financial commitments.
Thomas A. Bell: Chris will detail, our new 2024 guidance later in the call.
Thomas A. Bell: As I round out my first year at the helm of Leidos, I remain impressed with the capability of our people to deliver for our customers and shareholders. Over the last four quarters, revenue has grown 8%, and non-GAAP EPS has grown 25%. We've delivered adjusted EBITDA margins of 11.5%, and free cash flow conversion of 109%.
Speaker Change: As I round out my first year at the helm of lighthouse I remain impressed with the capability of our people to deliver for our customers and shareholders.
Speaker Change: Over the last four quarters revenue has grown 8% and non-GAAP EPS has grown 25%.
We've delivered adjusted EBITDA margins of 11, 5% and free cash flow conversion of 109%.
Thomas A. Bell: We've maintained rigorous investments in IRAD and business development. I'm very pleased that we've been able to refine the conversation about what's possible here at Leidos, especially around profitability. Leidos is indeed a healthy business.
Speaker Change: And we've maintained rigorous investments in Iran and business development.
Speaker Change: I'm very pleased that we've been able to refine the conversation about what's possible here at lighthouse, especially around profitability.
Speaker Change: Lighthouse is indeed, a healthy business.
Thomas A. Bell: So, for the remainder of my prepared remarks, I'd like to share some additional details about the purposeful steps we are taking to position Leidos for an awesome future. We are achieving and propelling superior profitable growth by focusing on three key elements. First, continuing to unlock full value and flawless execution in our new capabilities-focused organization. Second, increasing investment in distinct, organic, disruptive technology. And third, developing a robust, value-creating, merit-based Leidos profit and growth strategy. Let me walk through each of these elements with you.
Speaker Change: So for the remainder of my prepared remarks, I'd like to share. Some additional details about the purposeful steps, we are taking to position <unk> for an awesome future.
Speaker Change: We are achieving in propelling superior profitable growth by focusing on three key elements.
Speaker Change: First continuing to unlock full value and flawless execution in our new capabilities focused organization.
Speaker Change: Second increasing investment in distinct organic disruptive technologies.
Speaker Change: And third developing a robust value, creating merit based lightest profit and growth strategy.
Speaker Change: Let me walk through each of these elements with you.
Thomas A. Bell: First, we're very happy with the quick wins we're achieving from our capability-based organizational realignment. We anticipate that this move will continue to unlock significant value going forward. For example, by consolidating our commercial and international business into a single segment for the first time, we're now better able to truly serve our global customers. In February, I had the opportunity to attend the Munich Security Conference.
First we're very happy with the quick wins, we are achieving from our capability based organizational realignment.
Speaker Change: And we're anticipating that this move will continue to unlock significant value going forward.
For example by consolidating our commercial and international business into a single segment for the first time, we are now better able to truly serve our global customers.
In February I had the opportunity to attend the Munich Security Conference.
Thomas A. Bell: It was a sobering affair that made abundantly clear that pervasive global threats are in fact growing, and our collective efforts to help our allies and partners are becoming even more crucial. To give you an idea of where and how the new Leidos can help, global battlefields of the future demand ever more cross-domain interoperability and leading-edge technical solutions. As we collaborate with our customers and allies around the world, we gain valuable insights into their interconnected issues across borders.
Speaker Change: It was a sobering affair, which made abundantly clear that pervasive global threats are in fact growing.
Speaker Change: And our collective efforts to help our allies and partners are becoming even more crucial.
Speaker Change: To give you an idea of where and how the new light us can help global battlefields of the future demand ever more cross domain interoperability and leading edge technical solutions.
Speaker Change: As we collaborate with our customers and allies around the world, we gained valuable insights into their interconnected issues across borders.
Thomas A. Bell: Our realignment, which integrates all our international customer touchpoints into one organization, enables us to better correlate and quickly respond with a whole-of-Leidos solution to their critical emerging needs. Also, globally, the AUKUS Trilateral Security Partnership represents a unique opportunity for Leidos as Australia, the UK, and the US seek to work even more closely together. The focus of AUKUS Pillar 2 is seamless information sharing, AI and autonomy, advanced cyber, hypersonics, and electronic warfare. This list reads like a catalog of Leidos strengths.
Speaker Change: Our realignment, which integrates all our international customer touch points into one organization.
Speaker Change: Enables us to better correlate and quickly respond with a whole of light OS solution to their critical emerging needs.
Speaker Change: Also globally, the Orcus Trilateral security partnership represents a unique opportunity for light OS as Australia, the UK and the U S seek to work even more closely together.
Speaker Change: The focus of August pillar, two is seamless information sharing.
AI on autonomy advanced cyber hypersonic and electronic warfare.
Speaker Change: This list reads like a catalog of lighthouse strength.
Thomas A. Bell: We believe Leidos, through our new commercial international segment, is uniquely positioned to serve these ambitions like no other. Second, we will continue to accelerate investment in distinct organic disruptive technology. On my first earnings call, I highlighted technology innovation as a core of Leidos. Nearly a year into this role, I can confidently reaffirm that the technology prowess at Leidos is impressive, broad, and deep, continually sharpening our portfolio of cutting-edge technologies, what I call the golden bulk, to lead the market will remain foundational to our North Star. At Leidos, innovation is everywhere, but we have a particular passion for and focus on remaining best in class in free technology. Trusted Mission AI, Full Spectrum Cyber, and Secure Rapid Software.
Speaker Change: We believe light us through our new commercial international segment is uniquely positioned to serve these ambitions like no other.
Second we will continue to accelerate investment in distinct organic disruptive technologies.
Speaker Change: On my first earnings call I highlighted technology innovation as a core of lighthouse.
Speaker Change: Nearly a year into this role I can constant confidently reaffirm that the technology prowess at lighthouse is impressive broad and deep.
Speaker Change: Continually sharpening our portfolio of cutting edge technologies, what I call Golden bolts to lead turn the market will remain foundational to our north star.
Speaker Change: At lighthouse innovation is everywhere.
Speaker Change: But we have a particular passion and focus on our remaining best in class and three technologies trustee.
Speaker Change: <unk> trusted mission AI.
Speaker Change: Full spectrum cyber and secure rapid software.
Speaker Change: In each we maintain a robust Iran pipeline in what we call accelerators.
Thomas A. Bell: In each, we maintain a robust IRAD pipeline in what we call accelerators, staffed with incredibly smart people who work across the entire customer solution set. And we combine the resulting immense organic technical prowess with a best-in-class commercial partnership program to truly bring making smarter to life. Let's talk about one of these accelerators.
Speaker Change: Staffed with incredibly smart people, who work across the entire customer solution set.
Speaker Change: And we combined the resulting immense organic technical prowess with a best in class commercial partnership program to truly bring making smart smarter to life.
Speaker Change: Let's talk about one of these accelerators.
Admission AI spans the breadth of our portfolio and is integral in practically all our customer solutions.
Thomas A. Bell: Trusted Mission AI spans the breadth of our portfolio and is integral to practically all our customer solutions. Our trusted MissionAI solutions work as a partner to humans in transforming the way we deliver high quality, rapid, and secure outcomes for our customers' most complex missions. For example, across the intelligence community, we have several large classified contracts where we're leveraging trusted mission AI to exploit vast amounts of data to address ever-changing national security challenges.
Speaker Change: Our trusted mission AI solutions work as a partner to humans and transforming the way, we deliver high quality rapid and secure outcomes for our customers most complex missions.
Speaker Change: For example across the intelligence community, we have several large classified contracts, where we're leveraging trusted mission AI to exploit vast amounts of data to address ever changing national security challenges.
In the cyber realm, our team of experts has spent the last three years developing the next generation of defensive cyber tools.
Speaker Change: These tools use AI to automate the discovery of new vulnerabilities and the development of novel defenses.
Speaker Change: This unique solution allows us to proactively deploy defenses before attacks occur proof.
Speaker Change: Crucial and foreseeing averting and defeating cyber risks.
Thomas A. Bell: In the cyber realm, our team of experts has spent the last three years developing the next generation of defensive cyber tools. These tools use AI to automate the discovery of new vulnerabilities and the development of novel defenses.
Speaker Change: In defense systems trusted mission AI is the enabling technology that anchors all our autonomy work.
Speaker Change: We've built the first generation of autonomous vessels for the U S. Navy several of which recently trends transited the Pacific twice as part of a manned unmanned task force.
Thomas A. Bell: This unique solution allows us to proactively deploy defenses before attacks occur, crucial in foreseeing, averting, and defeating cyber risk. For defense systems, Trusted Mission AI is the enabling technology that anchors all our autonomy work. We've built the first generation of autonomous vessels for the U.S. Navy, several of which recently transited the Pacific twice as part of a manned, unmanned task. And we're now applying this proven trusted mission AI technology to the next generation of unmanned surface vessels.
Speaker Change: And we're now applying this proven trusted mission AI technology to the next generation of unmanned surface vessels.
Speaker Change: And software and IP were leveraging our exclusive relationships with key emerging technology providers to bring the best of the latest generation of generative AI to our customers.
This enables us to uniquely position our customers to operate more efficiently.
Speaker Change: Delivering real quantifiable impact.
Speaker Change: Let me share a couple of examples here.
Speaker Change: Our partnership with <unk> leverages their commercial cutting edge Gen AI coding assistant to transform the way we develop software.
Thomas A. Bell: In software and IT, we're leveraging our exclusive relationships with key emerging technology providers to bring the best of the latest generation of generative AI to our customers. This enables us to uniquely position our customers to operate more efficiently, delivering real, quantifiable impact. Let me share a couple examples here.
Speaker Change: And just a few months by combining our unparalleled government customer knowledge with their tools power, we've proven productivity increases in software development of one third.
Speaker Change: And we know these solutions are deployable even into the most secure customer environments.
Speaker Change: Our exclusive partnership with move works gives us a differentiated ability to bring our customers. The best in GI Gen AI based <unk> service desk solutions.
Thomas A. Bell: Our partnership with Sourcegraph leverages their commercial, cutting-edge, Gen-AI coding assistance to transform the way we develop software. In just a few months, by combining our unparalleled government customer knowledge with their tools' power, we've proven productivity increases in software development of one-third. And we know these solutions are deployable even in the most secure customer environment.
Speaker Change: We've already deployed their technology within the <unk> environment and have completely automated processing of thousands of service requests.
Our focus on integrating trusted mission AI into our customer solutions, rather than just selling AI labor positions us uniquely to meet the growing demand for AI solutions across our customers.
Speaker Change: I Trust. These examples begin to give you a sense of our leadership position in all our Golden Bulks, but especially trusted mission AI.
Thomas A. Bell: Our exclusive partnership with Moveworks gives us a differentiated ability to bring our customers the best in-gen AI-based IT service desk solutions. We've already deployed their technology within the Leidos IT environment and have completely automated the processing of thousands of service requests. Our focus on integrating trusted mission AI into our customer solutions, rather than just selling AI labor, positions us uniquely to meet the growing demand for AI solutions across our customers.
Speaker Change: But if you'd like to see more of our solutions in action and meet some of our Wicked Smart people I invite you to an investor's event, we will be hosting here at our global headquarters in Reston on 12 June.
Speaker Change: Finally, I'd like to give you an update on the development of our strategy for <unk> second decade of growth.
Speaker Change: As I mentioned during our last call. This is a year of deep formally structured strategic conversations across the whole of the business.
Speaker Change: And while this effort will not be complete until early next year I did want to share with you know some high level principles that are guiding our work.
Thomas A. Bell: I hope these examples begin to give you a sense of our leadership position in all our golden bolts, but especially trusted mission AI. But if you'd like to see more of our solutions in action and meet some of our wicked smart people, I invite you to an investor event we will be hosting here at our global headquarters in Reston on 12 June. Finally, I'd like to give you an update on the development of our strategy for Leidos' second decade of growth.
Speaker Change: Principals of our upcoming strategy, we'll be doubling down on our core strengths.
Speaker Change: Seeking to exploit the power of repeatable business models.
Speaker Change: Making speed a conscious competitive discriminator.
Speaker Change: Differentially investing in the areas of greatest potential.
Building trusted mission AI into everything we do.
Speaker Change: And uncovering unique opportunities to expand light OS into logical closely adjacent growth markets.
Speaker Change: These guiding principles will enable us to stay true to what we do best.
Thomas A. Bell: As I mentioned during our last call, this is a year of deep, formally structured, strategic conversations across the whole of the business. And while this effort will not be complete until early next year, I did want to share with you now some high-level principles that are guiding our work. The principles of our upcoming strategy will be doubling down on our core strength, seeking to exploit the power of repeatable business models, and making speed a conscious competitive discriminator.
Speaker Change: Being quick to respond to the opportunities that are emerging at pace in our market.
Speaker Change: Also of note importantly, as we think about our strategy, we will continue to view, our balance sheet and cash generation capacity as key strategic assets.
Speaker Change: I remain committed to a disciplined capital management and deployment policy.
Speaker Change: <unk> a focus on shareholder returns in the near term.
Speaker Change: In closing we're off to a great start this fiscal year.
Thomas A. Bell: Differentiating in the areas of greatest potential, building trusted mission AI into everything we do, and uncovering unique opportunities to expand Leidos into logical, closely adjacent growth markets. These guiding principles will enable us to stay true to what we do best, while being quick to respond to the opportunities that are emerging at pace in our market. Also of note, importantly, as we think about our strategy, we will continue to view our balance sheet and cash generation capacity as key strategic assets. I remain committed to a disciplined capital management and deployment policy, continuing a focus on shareholder returns in the near term.
We're committed to building on our successes and deliver smarter outcomes for our customers shareholders and each other.
Speaker Change: As we continue to push the boundaries and challenge ourselves to think bigger I am confident that 2024 will be light <unk> best year, So far.
Speaker Change: We will see tremendous achievements.
Speaker Change: Crystallizing compelling growth strategy.
Speaker Change: With that I'll pass the call to Chris to discuss our financial results for the first quarter and our financial promises to you for the full year Chris.
Speaker Change: Chris.
Chris: Thanks, Tom and thanks to everyone for joining us today.
Chris: The first quarter operating in our new organization was a great one far surpassing our initial expectations.
Chris: While health and civil was a standout each segment's relentless focus on innovation and operational efficiency led to above planned performance in revenue profit and cash in every reporting segment.
Chris: Putting these results in the context of the full year, we are well on track to deliver an exceptional year of top and bottom line performance.
Thomas A. Bell: In closing, we're off to a great start this fiscal year. We are committed to building on our successes and delivering smarter outcomes for our customers, shareholders, and each other. As we continue to push the boundaries and challenge ourselves to think bigger, I am confident that 2024 will be Leidos' best year so far, and it will see tremendous achievements and a crystallizing, compelling growth strategy. With that, I'll pass the call to Chris to discuss our financial results for the first quarter and our financial promises to you for the full year. Thanks, Tom, and thanks to everyone for joining us.
Chris: Turning to the income statement on slide five rare.
Chris: Revenues for the first quarter were $3 98 billion up seven 5% year over year with.
Chris: With appropriations in place our teams are working with their customers execute on vital missions.
Strong top line growth in the first quarter enabled us to achieve record profitability.
Chris: Adjusted EBITDA was $490 million for the quarter up 42% year over year in.
Chris: And adjusted EBITDA margin increased 290 basis points to 12, 3%.
Chris: non-GAAP net income was $313 million and non-GAAP diluted EPS was $2 29.
Chris: 53% and 56% respectively.
This explosives earnings growth was the result of core operating performance.
Christopher R. Cage: The first quarter operating in our new organization was a great one, far surpassing our initial expectations. While Health and Civil was a standout, each segment's relentless focus on innovation and operational efficiency led to above-plan performance in revenue, profit, and cash in every reporting segment. Putting these results in the context of the full year, we are well on track to deliver an exceptional year of top and bottom line performance. Turning to the income statement on slide five. Revenues for the first quarter were $3.98 billion, up 7.5% year-over-year.
Chris: Net impact of a slightly lower net interest expense and share count was wholly offset by a slightly higher tax rate compared with the prior year period.
This bottom line performance not only boosted our cash flows, but it put us in a favorable position to continue reinvesting across the business to support the execution of our longer term strategic objectives.
Chris: Turning to the segment drivers on slide six.
Chris: National Security and digital revenues increased 2% year over year, the largest growth catalysts were increased volumes on the Sentinel and desk programs, which more than offset a focused fox loss early in 2023.
Chris: National Security and digital non-GAAP operating income margin increased 120 basis points from the prior year quarter to 10, 1% with some milestone achievements strong cost control and excellent program execution.
Christopher R. Cage: With appropriations in place, our teams are working with their customers to execute on vital missions. Strong top-line growth in the first quarter enabled us to achieve record profitability. Adjusted EBITDA was $490 million for the quarter, up 42% year-over-year.
Chris: Health and civil revenues increased 19% over the prior year quarter and non-GAAP operating income margin also came in at 19% up from 12, 2% a year ago.
The primary driver of revenue growth and increased profitability with higher volumes across our managed health services portfolio.
Chris: We entered the year with tempered expectations around medical exam volumes, but were seeing increased complexity impact that cases, and although we're investing heavily to drive throughput. The team did an amazing job at improving efficiency optimizing resources and delivering exceptional service to the nation's active duty.
Christopher R. Cage: An adjusted EBITDA margin increased 290 basis points to 12.3%. Non-GAAP net income was $313 million, and non-GAAP diluted EPS was $2.29, up 53% and 56%, respectively. This explosive earnings growth was the result of core operating. The net impact of a slightly lower net interest expense and share count was wholly offset by a slightly higher tax rate compared to the prior year period. This bottom-line performance not only boosted our cash flows, but it put us in a favorable position to continue reinvesting across the business to support the execution of our longer-term strategic objective.
Chris: Members reservists and veterans.
Chris: Commercial international revenues increased 4% and non-GAAP operating income margin was eight 3% up 360 basis points compared to the prior year.
Chris: We had increased deliveries of security products and we're seeing the impact of the changes we made in the SCS business, including a leaner cost structure improved supply chain and rationalized product and geographic portfolio.
Chris: So our work is not done and fully optimizing the security products business I am proud of the team for their performance and recovery since this time last year.
Chris: Finally defense systems revenues increased 7% year over year with increased volumes in our airborne ISR and hypersonic businesses.
Chris: Defense systems, non-GAAP operating margins of 8% declined 170 basis points over the prior year quarter, but were up 30 basis points sequentially and we remain committed to margin improvement for this segment for the full year.
Chris: Turning now to cash flow and the balance sheet on slide seven.
Christopher R. Cage: Turning to the segment drivers on slide six, national security and digital revenues increased 2% year over year. The largest growth catalysts were increased volumes on the Sentinel and DES programs, which more than offset a focus box loss early in 2023. National Security and Digital Non-Gap Operating Income Margin increased 120 basis points from the prior quarter to 10.1%, with some milestone achievements, strong cost control, and excellent program execution. Health and civil revenues increased 19% over the prior year quarter, and non-GAAP operating income margin also came in at 19%, up from 12.2% a year ago.
Chris: We generated $63 million of cash flow from operating activities and $46 million of free cash flow.
Chris: DSO for the quarter was 62 days unchanged from a year ago.
Chris: In Q1, we repurchased a net of $170 million worth of shares including $150 million on the open market.
Chris: And paid $53 million in dividends.
We ended the quarter with $633 million in cash and cash equivalents and $4 7 billion of debt.
Chris: Our gross leverage ratio now sits at two six times comfortably below our three times target.
Chris: Onto the forward outlook on slide eight.
Chris: As we look ahead to the rest of the fiscal year 2024, we are poised to capitalize on the momentum we've been building.
Chris: Based on our strong Q1 and improved outlook, we are raising our 2024 guidance for all metrics.
Chris: We now expect revenue between 16% and $16 4 billion, an increase of $301 million to the range.
Chris: Our new adjusted EBITDA margin range is mid to high 11%, which would be record record profitability for our full fiscal year.
Chris: With an improving revenue and margin outlook, we're raising our non-GAAP diluted EPS by <unk> 90.
Chris: To a new range of $8 40 to $8 80.
Chris: And finally, we are raising our operating cash flow target by 200 million to approximately $1 3 billion for the year.
Chris: Underpinning this updated guidance is a positive outlook on business development.
Christopher R. Cage: The primary driver of revenue growth and increased profitability was higher volumes across our managed health services portfolio. We entered the year with tempered expectations around medical exam volumes, but we're seeing increased complexity on PACTAC cases. And although we're investing heavily to drive throughput, the team did an amazing job at approving efficiency, optimizing resources, and delivering exceptional service to the nation's active duty members, reservists, and veterans. Commercial and international revenues increased 4%, and non-GAAP operating income margin was 8.3%, up 360 basis points compared to the prior year.
Chris: In the first quarter, we booked a net of $3 7 billion, which translated to a book to Bill of <unk> nine times for the quarter and one one times for trailing 12 months.
Chris: Quarterly bookings total excludes a multibillion classified award that is currently under protest and a $630 million Defense Systems Award received on April one.
Chris: Both of which are new workflows we're.
Chris: We're seeing positive business development momentum and we expect our awards this year to support our growth objectives.
Chris: Finally, let me give you some sector specific movements that color our full year guidance.
Chris: On the fourth quarter call, we highlighted that health and civil had the potential to outperform if medical examination volumes remained high.
Chris: Since then volumes have actually increased given the complexity impact that cases.
Chris: The second quarter should see similar levels of performance or even a little better.
Chris: However, as a result of the increased volumes. The BBA has burned through some of its contract sooner than planned and we will have to recompete them early.
Chris: We are well positioned to continue our best in class service as a long standing trusted mission partner to the VA, but we are planning for performance in the health and civil segment to moderate in the back half of the year through the competitive process.
Christopher R. Cage: We had increased deliveries of security products, and we're seeing the impact of the changes we made in the SES business, including a leaner cost structure, improved supply chain, and rationalized product and geographic portfolio. Though our work is not done in fully optimizing the security products business, I'm proud of the team for its performance and recovery since this time last year. Finally, defense systems revenues increased 7% year-over-year, with increased volumes in our airborne ISR and hypersonics business.
Chris: First quarter revenue growth in the defense systems in commercial and international segments was more robust than anticipated.
Chris: Although we see some potential for growth in both segments, we still see the full year revenue performance as relatively flat.
In commercial and international some of the geographies and products, we exited will begin to weigh on revenue.
Chris: And defense systems is still working to mature some of its developmental programs.
Chris: Taken together with funding certainty positive demand signals and the performance seen across all four segments. This quarter, we feel confident in our ability to deliver within these new ranges with that operator, we're ready to take some questions.
Speaker Change: Thank you.
Speaker Change: To ask a question you will need to press star one on your telephone.
Speaker Change: To withdraw your question. Please press Star one again, please wait for your name to be announced we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster one moment for your first question. Please.
Christopher R. Cage: Defense Systems' non-GAAP operating margins of 8% declined 170 basis points over the prior year quarter but were up 30 basis points sequentially, and we remain committed to margin improvement for this segment for the full year. Turning now to cash flow and the balance sheet on slide seven. We generated $63 million of cash flow from operating activities and $46 million of free cash flow. DSO for the quarter was 62 days, unchanged from a year ago.
Speaker Change: Our first question comes from the line of Bruce <unk> with Stifel. Your line is now open.
Bruce: Hey, good morning, Thank you for the questions good morning Bert.
Bruce: Tom When you started I guess about a year ago. You said you wanted to evaluate the allocation of capital to each business based on the business case supporting.
Bruce: The return for return on capital for each it would seem like capital is being put to best use right now in helping civil is that a near term phenomenon being driven by the path Act or is there a case for that business to be here.
Christopher R. Cage: In Q1, we repurchased a net of $170 million worth of shares, including $150 million on the open market, and paid $53 million in dividends. We ended the quarter with $633 million in cash and cash equivalents and $4.7 billion of debt. Our gross leverage ratio now sits at 2.6 times, comfortably below our three times target. Now on to the Forward Outlook on slide 8. As we look ahead to the rest of fiscal year 2024, we are poised to capitalize on the momentum we've been building.
Bruce: Last is growing and most profitable longer term as well.
Speaker Change: Thanks for the question Bert.
Speaker Change: I did say that and I do believe in a merit based strategy process.
Speaker Change: I mentioned that in my prepared remarks, because what we are doing in 2024 as we undertake this year of deep strategic thinking is analyzing all the business cases, and the sub business cases for where the best use of capital is to draw superior topline and Bottomline.
Speaker Change: Growth for lighters, and so as a result.
Speaker Change: We're able to put some seed corn in areas that are emerging in this year.
Christopher R. Cage: Based on our strong Q1 and improved outlook, we are raising our 2024 guidance for all Metro. We now expect revenue between $16 and $16.4 billion, an increase of $300 million to the range. Our new adjusted EBITDA margin range is mid to high 11%, which would be record profitability for a full fiscal year. With an improving revenue and margin outlook, we're raising our non-gap diluted EPS by 90 cents to a new range of $8.40 to $8.80.
Speaker Change: Even though the strategy process is not done and yes in fact, the investments we've made in our <unk>.
Speaker Change: Managed health care business is absolutely paying dividends now and that is the reason that business under Liz's leadership has been so well positioned to respond to the increased demands that have come our way. So we're very excited about the strategy process. We've got underway, we're very excited.
Speaker Change: About the ideas that are emerging from that strategy process and were seeing great benefit of past decisions. We made through last year about where to invest how to invest and which businesses to position for future growth. Chris did you want to add anything to that Bert I'd, just obviously, the health and civil organization.
Speaker Change: <unk> has been a standout and we do see that momentum continuing in Tom's point, it's been a multiyear investment strategy that has positioned us to be where we are and to deliver excellent results for our veterans.
Christopher R. Cage: And finally, we're raising our operating cash flow target by $200 million to approximately $1.3 billion for the year. Underpinning this updated guidance is a positive outlook on business development. In the first quarter, we booked a net of $3.7 billion, which translated to a book-to-bill of 0.9 times for the quarter and 1.1 times for the trailing 12 months.
Speaker Change: And be rewarded for that.
Speaker Change: But there are other parts of the portfolio, we're very excited about too and so I wouldn't limit our thinking and our investments to solely focus on health and civil and at the same time some of the health and civil.
Speaker Change: Organization results have benefited from investments we've made in things like AI and other capabilities at the center that apply broadly so youll see those strategies continue and Youll see us continue to accelerate those investments as the year unfolds.
Christopher R. Cage: The quarterly bookings total excludes a multibillion-dollar classified award that is currently under protest and a $630 million defense systems award received on April 1st, both of which are new work for Leidos Holdings. We're seeing positive business development momentum, and we expect our awards this year to support our growth objective. Finally, let me give you some sector-specific movements that color our full-year guidance. On the fourth quarter call, we highlighted that health and civil had the potential to outperform if medical examination volumes remained high. Since then, volumes have actually increased given the complexity of PACT Act cases. The second quarter should see similar levels of performance or even a little better.
Speaker Change: That's great. Thank you and Tom you spent.
Speaker Change: Chris You just mentioned it there you spent.
Speaker Change: Several minutes in your prepared remarks talking about AI.
Speaker Change: I think one of your peers. It gets a lot of credit for sort of being the leader in the industry of AI and that's taken some steps to breakout like what their sales are and how it impacts their win rate on certain contracts.
Speaker Change: It seems like you are pretty confident in what youre doing there and it would seem like it has helped quite a bit on your in your health business with the VA.
Speaker Change: Are there some examples or is there some sort of numbers you can give us related to AI just to sort of think better about your positioning as we go forward.
Speaker Change: Well, thanks, Bert, Yes, and yes.
Speaker Change: The fun thing about capitalism is many people look at the same market and decide to prosecute it in different ways. We're aware that our competitors are looking at selling AI labor and think it's a market unto itself.
Speaker Change: How we see the world, we see the world as difficult customer challenges and we saw ourselves as solution providers into that space, we see trusted mission AI as a huge key enabler to unlocking superior value for our customers and the solutions we bring forward.
Christopher R. Cage: However, as a result of the increased volumes, VBA has burned through some of its contracts sooner than planned and will have to re-compete them early. We are well-positioned to continue our best-in-class service as a long-standing, trusted mission partner to the VA, but we are planning for performance in the health and civil segment to moderate in the back half of the year through the competitive process. First quarter revenue growth in defense systems in commercial and international segments was more robust than anticipated.
Speaker Change: So we're going to continue to avoid breaking AI out as a specific target, but in the spirit of your questions.
Speaker Change: Then share with you some antidote will evidence for instance, while.
Speaker Change: We've been investing in AI the deployment of that has enabled us to improve quality on about.
Speaker Change: $1 billion of those health exam. So in other words some of the throughput we've been able to have in our clinics is the direct result of the efficiency that the AI tools, we have embedded in our solutions unlocks.
Christopher R. Cage: Although we see some potential for growth in both segments, we still see the full-year revenue performance as relatively flat, and Commercial International, some of the SES geographies and products we exited will begin to weigh on revenue, and Defense Systems is still working to mature some of its developmental programs. Taken together with funding certainty, positive demand signals, and the performance seen across all four segments this quarter, we feel confident in our ability to deliver within these new ranges. With that, Operator, we're ready to take some questions. Thank you. To ask a question, you'll need to press star 1-1 on your telephone.
Speaker Change: We've been able to put AI in our FCS Airport security business by linking things together, there we've been able to put AI in our unmanned systems command and control systems that will enable us to.
Speaker Change: Help unmanned systems quickly speak to each other and aggregate their effects. So we're going to continue to see trusted mission AI as not an end, but a means to serving customer missions and I hope that differentiation is something that you can join us on the 12th of June to understand.
Speaker Change: Even more.
Speaker Change: Thanks, Tom and thanks, guys.
Speaker Change: Thank you one moment for our next question. Please.
Speaker Change: Our next question comes from the line of Tobey Sommer with two Securities. Your line is now open.
Speaker Change: Hey, Good morning. This is Jasper bibb on for Tobey I think last call you talked about the initial.
Operator: To withdraw your question, please press star 11 again. Please wait for your name to be announced. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Bert Subin with Defo. Your line is now, Hey, good morning. Thank you for the questions. Good morning, Bert.
Jasper Bibb: Mid to high 10% guidance range on marginal basis sustainably grow off.
Jasper Bibb: And then you raised the 24 guidance significantly this quarter. So I guess looking forward. How are you thinking about the progression of margins given the progress you've already made this year, yes, Jasper thanks for that right.
Jasper Bibb: Obviously, we're very pleased with the start to the year end.
Jasper Bibb: Prepared remarks, we indicated it wasn't just the health and civil business. It was really all of our teams got it out of the gate strong in and so now our full year outlook has been updated to mid to high 11%.
Bert William Subin: Tom, when you started, I guess about a year ago, you said you wanted to evaluate the allocation of capital to each business based on the business case supporting the return on capital for each. It would seem like capital is being put to best use right now in health and civil. Is that a near-term phenomenon being driven by the PACT Act, or is there a case for that business to be your fastest growing and most profitable in the longer term as well? Yeah, thanks for the question, Bert.
Jasper Bibb: We think thats an area that <unk>.
Obviously, we're ahead of that in Q1, but that'll be strong performance across the business as the year unfolds and you think about some parts of the portfolio for example, commercial international and defense systems, both of which had good first quarters, but arent, yet where we expect that they will be on our margin performance basis. So there is upward.
Jasper Bibb: They're over the course of this year and into the future.
Thomas A. Bell: I did say that, and I do believe in a merit-based strategy process. I mentioned that in my prepared remarks, because what we are doing in 2024, as we undertake this year of deep strategic thinking, is analyzing all the business cases and the sub-business cases for where the best use of capital is to achieve superior top-line and bottom-line growth for Leidos. And so, as a result, we're able to put some seed corn in areas that are emerging this year, even though the strategy process is not done.
Jasper Bibb: For health and civil sustaining this level of performance through Q2 is what we indicated and we'll have to see how the competitive process plays out on the re competes in Q3 Q4, but there is the potential for that business to continue this momentum certainly through the back half of this year and into 'twenty five.
Speaker Change: Pivoting off of that a little bit I want to give a shout out to the team for how they've embraced this hole.
Speaker Change: Concept of our promises made promises kept culture. So while we have a standout first quarter performance in our health business. They are not the only business committed to continuing to perform through the year. So.
Thomas A. Bell: And yes, in fact, the investments we've made in our managed healthcare business are absolutely paying dividends now. And that is the reason that Encompass, under Liz's leadership, has been so well positioned to respond to the increased demands that have come our way. So we're very excited about the strategy process we've got underway. We're very excited about the ideas that are emerging from that strategy process. And we're seeing the great benefits of past decisions we made last year about where to invest, how to invest, and which businesses to position for future growth. Chris, do you want to add anything to that?
Speaker Change: We're very confident in our ability to hit the current range and we're very excited about the <unk>.
Speaker Change: Degrees of freedom that gives us to invest differentially in our future and really propel our next growth strategy to great Heights.
Speaker Change: Thanks that makes sense and then you mentioned the improvement in managed health programs for health and Civil segment this quarter.
Speaker Change: Just curious what the trends were on the legacy civil side of the segment as part of the growth in margins you've done a metric in the first quarter.
Speaker Change: Yes, the civil part of the portfolio has some excellent programs in there and and.
Liz and the team are bringing that altogether, it's more about the energy and the synergies that we see across those businesses on personnel.
Christopher R. Cage: Bert, I just, obviously, you know, the Health and Civil Organization has been a standout, and we do see that momentum continuing. And Tom's point, it's been a multi-year investment strategy that's positioned us to be where we are and to deliver excellent results for our veterans and be rewarded for that. But there are other parts of the portfolio we're very excited about too. And so I wouldn't limit our thinking and our investments to solely focus on Health and Civil.
Speaker Change: In software.
Speaker Change: Capabilities that can be extended to both sides of the equation.
Speaker Change: I'd say theres any particular standouts on the civil portfolio. It was a solid first quarter out of the gates and we look forward to building on that momentum as the year unfolds, especially.
Speaker Change: As we look at our FA business, and where that can extend capabilities to certain international customers et cetera, as a particular area of interest for us, but I can't let that question.
Speaker Change: Go without a little bit of a foot stomp on the.
Speaker Change: On the great performance, we are having in the health side of the business.
We are continuing to invest in innovation, there and some of the innovations that Bert asked us about before that were built during the Covid crisis puts us in this position to do exams are better for the BBA and some of the results that are behind the financial results.
Christopher R. Cage: And at the same time, some of the Health and Civil Organization results have benefited from investments we've made in things like AI and other capabilities at the center that apply broadly. So you'll see those strategies continue, and you'll see us continue to accelerate those investments as the year unfolds. That's great.
Bert William Subin: Thank you. And Tom, you spent, and Chris just mentioned it, several minutes in your prepared remarks talking about AI. You know, I think one of your peers gets a lot of credit for sort of being the leader in the industry for AI and has taken some steps to break out, like what their sales are and how it impacts their win rate on certain contracts.
Our that light us investments have allowed us to increase the total number of veteran served by 27% in 2023 and as Chris mentioned in his comments the volume is even increasing now in 2024.
Speaker Change: More than just that we're able to serve our rural veterans better by 33% and we're able to serve our homebound veterans by over 55%. So the investments we've made in technology and capability to take the clinics to the veterans are serving our veterans in ways that our innate.
Bert William Subin: It seems like you're pretty confident in what you're doing there, and it would seem like it's helped quite a bit in your health business with the VA. Are there some examples, or are there some sort of numbers you can give us related to AI, just to sort of think better about your positioning as we go forward? Well, thanks, Bert. Yes. And yes, the fun thing about capitalism is that many people look at the same market and decide to pursue it in different ways. We're aware that our competitors are looking at selling AI labor and think it's a market unto itself. But that's not how we see the world.
Speaker Change: <unk> us to then unlock volume and unlock financial results were very excited not only about the whole of lizards portfolio, but this part of the portfolio in particular.
Speaker Change: That's helpful. Thank you for taking the question.
Speaker Change: Okay. Thank you.
Speaker Change: One moment for our next question please.
Speaker Change: Our next question comes from the line of Sheila <unk> with Jefferies. Your line is now open.
Sheila: Thank you good morning, and that kudos to the latest chasing.
Sheila: The only thing that right candidate clearly Tom Great results.
Sheila: A whole lineup so maybe on Hudson, we talked about it a little of that Chris mentioned in his remarks in terms of the past Jack moderation can you maybe frame.
Thomas A. Bell: We see the world as difficult customer challenges, and we see trusted mission AI as a huge key enabler to unlocking superior value for our customers in the solutions we bring forward. So we're going to continue to avoid breaking AI out as a specific target. But in the spirit of your questions, I can share with you some antidotal evidence.
Sheila: How we should think about the upside and downside scenarios.
Chris: Yeah, so the <unk> volumes are.
Chris: <unk> forward.
Chris: In a unique position to liquidate that volume on behalf of the veterans administration and feel very good about that but as Chris mentioned in his comments.
Chris: That puts pressure on reaching the contract ceiling value for the veterans administration and they may have to.
Thomas A. Bell: For instance, while we've been investing in AI, the deployment of that has enabled us to improve the quality of about a billion health exams. In other words, some of the throughput we've been able to have in our clinics is the direct result of the efficiency that the AI tools we have embedded in our solutions unlock. We've been able to put AI in our SES airport security business by linking things together there. We've been able to put AI in our unmanned systems, command and control systems that will enable us to help unmanned systems quickly speak to each other and aggregate their effects.
Chris: And they will have to re compete that contract early however, we've got a great position.
Chris: Position for that Recompete, we feel very confident in the technology the capabilities and the team we have assembled to continue to serve veterans in this nation and so while as Chris said in his comments, we've provisioned for some slight moderation in profitability in the second half of the year, just because of the competitive die.
Chris: <unk> are being unsure of exactly how the veterans administration is going to put that RFP out.
Thomas A. Bell: So we're gonna continue to see trusted mission AI as not an end but a means to serving customer missions. And I hope that differentiation is something that you can join us on the 12th of June to understand even more. Thanks, Tom, and thanks, Chris.
We feel very good that that's a business. We're in it's a business. We can continue to grow and Thats a business that we can continue to serve our nation and its veterans very robustly, Chris Yes, Sheila I would just add I mean.
Chris: We have invested will continue to invest in increasing our ability to drive throughput and drive excellent service for the veterans.
Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Tobey Sommer with Truist Securities. Your line is now open. Hey, good morning. This is Jasper Vivant on behalf of Tobey.
Chris: <unk> gotten the strongest signal yet from the customer that the.
Speaker Change: The volume of activity should remain elevated and we see that continuing into 2025 and it's not just the number of cases is the complexity of those cases so.
Jasper Vivant: I think last call you talked about the initial mid to high 10% guidance range on margin as a basis to sustainably grow off, and then you raised the 24 guides significantly this quarter. So I guess, looking forward, how are you thinking about the progression of margins given the progress you've already made this year? Yeah, Jasper, thanks for that.
Speaker Change: We believe still in the early innings of where this thing can play out and we're going to continue to invest accordingly to make sure veterans are well served with great experiences I would say that even in our first quarter results, which were quite strong it wasn't aided by incentive fees as part of that too. So there is still some opportunities to drive that.
Speaker Change: Performance higher overtime, so really like how we're positioned in that business right now.
Speaker Change: Thank you and then maybe on defense systems Maarten, they were better sequentially, but down 170 bps year on year. So how do we think about maybe just focusing on buying a lot of key milestones.
Christopher R. Cage: Right. Obviously, we're very pleased with the start of the year. And as in our prepared remarks, we indicated it wasn't just the health and civil business; really, all of our teams got out of the gate strong. And, and so now our full year outlook has been updated to mid to high 11%. You know, we think that's an area that we're ahead of in Q1, but that'll be strong performance across the business as the year unfolds.
Maarten: In terms of the improvement in profitability.
Maarten: Yes, so I mean, a couple of things were tracking and Cindy leading that business is all over this with her team, but as we said in our remarks.
Maarten: We're actually pleased with the way we performed out of the gates in the first quarter. We're ahead of pace. There are some specific things we're focused on to drive margins higher over time, one of which we just completed at the end of last year getting dianetics fully integrated into the light us set of systems, whether that's financial HR et cetera, and our rate structure and so theres a lot more color.
Christopher R. Cage: And you think about some parts of the portfolio, for example, commercial, international, and defense systems, both of which had good first quarters but aren't yet where we expect that they will be on a margin performance basis. So there's an uplift there over the course of this year and into the future. And for health and civil, sustaining this level of performance through Q2 is what we indicated. And we'll have to see how the competitive process plays out on the re-competes in Q3, Q4, but there's the potential for that business to continue this momentum, you know, certainly through the back half of this year and into 2017. Hey, just pivoting off of that a little bit.
<unk> resource sharing efficiencies that are unlocked as part of that so that's very exciting program execution, it's a strength of light OS and it's an area that we've seen improvements in talent upgrades and process upgrades and that's an area that we can identify.
Maarten: Mile markers, along the rest of this year that will drive our program performance higher in our.
Maarten: Profitability higher as the year unfolds and then finally transitioning into next phase of key programs. We know sometimes on developmental programs. The early phases are not the most profitable lessons are learned and those are applied into the next round of bidding and I think the team has incorporated those and we feel good about the bids we've been putting out into our <unk>.
Maarten: Well positioned to win to keep growing that business and just a foot stomped that a little bit Sheila.
Maarten: I've mentioned.
Maarten: As I put stumped, an earlier comment about all of the businesses.
Thomas A. Bell: I want to give a shout out to the team for how they've embraced this whole concept of a promises made, promises kept culture. So while we have a standout first quarter performance in our health business, they are not the only business committed to continuing to perform through the year. So we're very confident in our ability to hit the current range, and we're very excited about the degrees of freedom that that gives us to invest differently in our future and really propel our next growth strategy to great heights. Thanks, that makes sense.
Maarten: Keeping up with their commitments to Chris Ni for their full year performance and the promises made promises kept.
Modus operandi and I'm very happy to report that Cindy is amongst them.
Maarten: Undeterred by.
A less robust start to the year, then perhaps we might have hoped for but very committed to the full year results and she and her team are committed to meeting or exceeding those.
Thank you.
Speaker Change: Thank you one moment for our next question. Please.
Speaker Change: And next question comes from the line of Seth Schiffman with Jpmorgan. Your line is now open.
Okay.
Good morning, this is rob on for Seth.
Rob: Good morning, Hey, Rocco.
Rob: On margin milestone achievement supported the National security and digital margin in the quarter should we expect additional milestones in the coming quarters or should the margin ratio normalize.
Jasper Vivant: And then you mentioned the improvement in managed health programs for the health and civil segment this quarter. I guess I was just curious what the trends were on the legacy civil side of the segment as part of the growth and margins you demonstrated in the first quarter. Yeah, the civil part of the portfolio has some excellent programs in there. And, you know, as Liz and the team are bringing that all together, it's more about the energy and the synergies that we see across those businesses in personnel and software capabilities that can be extended to both sides of the equation. I wouldn't say there are any particular standouts in the civil portfolio.
Rob: On health and Civil Q2 is expected to be our strongest Q1, but should we think about the back half following into the mid teens on margin <unk>.
Rob: And in the business.
Rob: Obviously pending that re compete.
Yeah, Rocco I'll start and Tom can first off obviously national security in digital.
Speaker Change: Excellent program execution is.
Speaker Change: What we expect from that team because they've consistently delivered it and sometimes you're not able to anticipate that youll knock it out of park on award fees. The way. They have continued to do so but I wouldn't bet against them. So we'll continue to see program execution is the strength there.
Christopher R. Cage: It was a solid first quarter out of the gates, and we'll look forward to building on that momentum as the year unfolds, especially as we look at our FAA business and where that can extend capabilities to certain international customers, etc. It's a particular area of interest. But I can't let that question not go without a little bit of a foot stomp on the great performance we're having on the health side of the business.
Speaker Change: And as it relates to health, yes, when we health and civil when we started the year. We signaled they are in the mid teens was a reasonable expectation for the year, we've exceeded that will continue to exceed that level through Q2, and and I think the even the second half of the year. There is the possibility and potential it could be better than that and we will be able to give you some better.
Speaker Change: Color on that as we get closer to the Recompete process.
Speaker Change: I would just say that my whole.
Christopher R. Cage: You know, we are continuing to invest in innovation there, and some of the innovations that Bert asked us about before that were built during the COVID crisis put us in this position to do exams better for the VBA. And some of the results that are behind the financial results are that Leidos investments have allowed us to increase the total number of veterans served by 27% in 2023. And, as Chris mentioned in his comments, the volume is even increasing now in 2024. More than just that, we're able to serve our rural veterans better by 33 percent, and we're able to serve our homebound veterans by over 55 percent.
Speaker Change: Promises made promises kept culture.
Speaker Change: Yes.
Never uninvited over performance.
Speaker Change: So over performance is welcomed over performance is understood as a as a goal we all look to achieve and I have every confidence Roy and his team are going to <unk>.
Speaker Change: Work to over perform both in this year in the future, we havent talked about it yet, but our business development pipeline is very exciting and very robust and nowhere is it more robust and more exciting than in roys business in our national security and digital space. So he and Steve are worse.
Speaker Change: Very hard to make sure we are positioned to win in the marketplace in the future not only to deliver results now but to deliver our results for the next five years.
Thomas A. Bell: So, the investments we've made in technology and the capability to take the clinics to the veterans are serving our veterans in ways that are enabling us to then unlock volume and unlock financial results. We're very excited not only about the whole of Liz's portfolio but this part of the portfolio in particular. That's helpful. Thank you for taking the questions.
Speaker Change: Great. Thank you and then should we expect hypersonic so drive defense systems growth this year or wasn't the businesses changing to limit growth.
Speaker Change: Well hypersonic is one of several areas that we're focused on in our defense systems business and yes, we're very excited about the capabilities. We've proven in our hypersonic programs and in fact this week, we are having very robust conversations with customers around where they want to go and how they want it.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Sheila Kahyaoglu with Jeffries. Your line is now open. Thank you. Good morning.
Sheila Karin Kahyaoglu: And kudos to the Leidos board for choosing the right candidate. Clearly, Tom, great results, and the whole Leidos team. So maybe on health, we talked about it a little bit, and Chris mentioned it in his remarks, in terms of pack-jack moderation. Can you maybe frame how we should think about the upside and downside scenarios there? Yeah, so, you know, the PAC DAC volumes are racing forward. We're in a unique position to liquidate that volume on behalf of the Veterans Administration and feel very good about that.
Speaker Change: Take that technology forward, obviously, it's a it's a wicked hard problem, but we've got our wicked smart people.
Speaker Change: Working to solve them within for the customers, but that's not the only one we've obviously got a lot of expectation with regard to if pick enduring shield.
Speaker Change: That program is progressing well through the Army test program. This year and we're very hopeful for an <unk> decision at the end of this year and.
Speaker Change: Why field of view tranche two.
Speaker Change: We were disappointed that the prime for our payload wasn't selected we're working several avenues to maintain our prowess in that market and serve our nation and their understanding of what's happening from a from a threat standpoint, so our defense business isn't only hypersonic, but hypersonic.
Sheila Karin Kahyaoglu: But, as Chris mentioned in his comments, that puts pressure on reaching the contract ceiling value for the Veterans Administration, and they may have to, and they will have to, recompete that contract early. However, we've got a great position for that recompete. We feel very confident in the technology, the capabilities, and the team we have assembled to continue to serve veterans in this nation. And so while, as Chris said in his comments, we've provisioned for some slight moderation in profitability in the second half of the year just because of the competitive dynamics and our being unsure of exactly how the Veterans Administration is going to put that RFP out, we feel very good that that's a business we are in, that' Chris?
Is one of those areas and we're very excited about the suite of capabilities. We're currently focused on necking down too and prosecuting effectively.
Speaker Change: Thank you.
Speaker Change: One moment for our next question and next question comes from the line of Matt Akers with Wells Fargo. Your line is now open.
Hey, good morning, guys. Thanks for the question.
Matthew Carl Akers: I Wonder if you could comment on the security products business I think you said in the.
Matthew Carl Akers: The prepared remarks, there's still work to be done optimizing that so just curious if you could touch on I think you are in sourcing some products you talked about that last year then.
Matthew Carl Akers: How big should we think about some of these products that you have decided to exit.
Speaker Change: Thanks, Thanks for that.
Thomas A. Bell: Yeah, Sheila, I'd just add, I mean, we've invested, and we'll continue to invest in increasing our ability to drive throughput and drive excellent service for the veterans. We've gotten the strongest signal yet from the customer that, you know, the volume of activity should remain elevated, and we see that continuing to 2025. And it's not just the number of cases; it's the complexity of those cases.
Matthew Carl Akers: Matt we.
Matthew Carl Akers: We are very very proud of Vicky and her team and the Swift actions they've taken through.
Matthew Carl Akers: Through last year and since last year, they're engaged they're excited about the opportunities they see.
Matthew Carl Akers: And I'm very happy that they're not looking at that world through rose colored glasses. They are.
Matthew Carl Akers: Positively inclined pragmatists looking at the market for what it is and looking at how we prosecute that market in the lightest weight to the best.
Christopher R. Cage: So, you know, we're still in the early innings of where this thing can play out, and we're going to continue to invest accordingly to make sure veterans are well served with great experiences. But I would say that, you know, even our first quarter results, which were quite strong, weren't aided by incentive fees as part of that too.
To the best degree possible, we did exit certain geographies as we talked about last year and we continue to refine the.
Matthew Carl Akers: The products were actually offering into the marketplace, because we decided those have become commoditized and they werent a great place for light us to perform but while it's still early innings. We're very excited about the business. We're spending a lot of time on the strategy for how and where we grow that business into the.
Christopher R. Cage: So there's still some opportunities to drive that performance higher over time. I really like our position in that business right now. And then maybe on defense systems margins, they were better sequentially, but down 170 bucks year on year.
Matthew Carl Akers: Future than we are.
Matthew Carl Akers: We expect that to be a part of our conversation is the strategy unfolds through the year and into next Chris.
Speaker Change: And I would just add I mean, we're excited about getting our Charleston facility up and running and the team's been doing a good job there actually the leadership team will be down there next week to lay eyes on it ourselves. So we're looking forward to seeing that there is a variety of products I won't get into specifics about which ones were pulling out of the portfolio, but clearly we're focused on where we have technical.
Christopher R. Cage: So how do we think about maybe just focusing on Dianetics, the key milestones there in terms of improvement in profitability? Yeah, so I mean, a couple things we're tracking, and you know, Cindy, leading that business, is all over this with her team. But as we said in our remarks, we're actually pleased with the way we performed out of the gates in the first quarter. We're ahead of schedule. There are some specific things we're focused on to drive margins higher over time, one of which we just completed at the end of last year, getting Dynetics fully integrated into the Leidos set of systems, whether that's financial, HR, et cetera, and our rate structure. And so there's a lot more collaboration, resource sharing, and efficiencies that are unlocked as part of that.
Speaker Change: <unk> leadership positions.
Speaker Change: People screening has been a strength of that business for a long time, you can imagine that will be something we continue to stick with and double down on we have excellent suite of port borders equipments, but there are some.
Speaker Change: <unk> of the checked baggage checkpoint baggage et cetera that we just have to continue to evaluate where we're positioned.
Speaker Change: Make those changes accordingly.
Speaker Change: Great. Thank you and then.
Speaker Change: I also want to ask on the Capex.
Speaker Change: Bit of a slow start to the year I might've missed it but it is $190 million still the right way to think about that for this year and does that sort of ramp up through the year, Yes, Matt that's still our our budget and Theres, all where theres a little bit of reserve in there and we asked the teams to be smart and disciplined even when we allocate them approvals but.
Christopher R. Cage: So that's very exciting. Program execution is a strength of Leidos, and it's an area that we've seen improvements in talent upgrades and process upgrades, and that's an area where we can identify mile markers throughout the rest of this year that'll drive our program performance higher and our profitability higher as the year unfolds. And then finally, transitioning into the next phase of key programs. You know, sometimes on developmental programs, the early phases are not the most profitable, lessons are learned, and those are applied to the next round of bidding.
Speaker Change: But youll see a few things ramp up we've got our San Diego facility that we're going to be proud of to get a brand new facility for a lot of our classified work out in San Diego.
Speaker Change: <unk> this summer and the teams are also looking for.
Speaker Change: Interesting ways that we can get in front of the customer on unmanned capabilities demos test beds et cetera. So we expect that to ramp up a little bit, but we'll continue to manage that tightly.
Speaker Change: Chris Gregg just mentioned San Diego, a little bit I will just put stumped the great job. The team is doing there. We are building a facility that will be world class in terms of security and up to the latest standards.
Speaker Change: Our nation and so we will have facilities on the west coast that are.
Speaker Change: As good as any and better than most and we're very excited about the conversations and the opportunities that will unlock for us with our customers and the opportunity therefore to serve them at the highest classification levels.
Christopher R. Cage: And I think the team has incorporated those, and we feel good about the bids we've been putting out and are well positioned to win to keep growing that business. Yeah, and just to foot stomp on that a little bit, Sheila, I mentioned as I foot stomped an earlier comment about all the businesses keeping up with their commitments to Chris and I for their full year performance in the Promises Made, Promises Kept modus operandi.
Speaker Change: Great. Thank you. Thank you Sir thank you.
Speaker Change: Next question comes from the line of Noah <unk> with Goldman Sachs. Your line is now open.
Speaker Change: Yeah.
Noah: Hi, good morning, everyone.
Noah: Noah.
Noah: So I guess on the margins.
Noah: In the quarter.
Noah: Total company EBITDA margin over 12%.
Noah: Despite what you are saying about defense systems in the back half of last year kind of mid elevens with the same thing in a little bit more normal health margin.
Christopher R. Cage: And I'm very happy to report that Cindy is amongst them, undeterred by a less robust start to the year than perhaps we might have hoped for, but very committed to the full year results, and she and her team are committed to meeting or exceeding those. Thank you.
Noah: I guess, just without even putting a timeframe on it but just as you go forward beyond this year.
Noah: Should we all be thinking of lighthouse is a 12% plus EBITDA margin business.
Noah: Or is that.
Noah: Getting ahead of ourselves, depending on where health and civil shakeout.
Speaker Change: Well no we're not in the point, where we're guiding to 2025 and beyond.
Speaker Change: But I remember last year, when we were wrapping up the year, we were talking about us.
Operator: One moment for our next question, please. Our next question comes from the line of Seth Seifman with J.P. Morgan. Your line is now open. Good morning, this is a rough one for Seth. Hey, good morning. Hey, Rocco.
Speaker Change: Being.
Speaker Change: Hi, <unk>, Hi high turns business and people were chastising me for suggesting we might be over 11 now.
Speaker Change: And now we're proving we can be over 11, and very eager to see what the full potential of this business is that's not a commitment to maintain margins at a certain level, we're going to make smart decisions were not going to get locked into.
Rocco: On margins, milestone achievement supported the national security and digital margin in the quarter. Should we expect additional milestones in the coming quarters, or should the margin rate there normalize? And on health and civil, Q2 is expected to be as strong as Q1, but should we think about the back half falling into the mid-teens on margins, as seen historically in the business, obviously pending the re-competes? Yeah, Rocco, I'll start, and Tom can footstomp.
Speaker Change: Certain preconceived notions of of where we want to go but.
Speaker Change: Better is always good and we want to bank those gains and expand and exploit other areas to grow the business. So.
Speaker Change: As we've guided this year high Elevens is our is our.
Our commitment to you in 2024.
Speaker Change: And as we prosecute 2025 will be very eager to see if we can meet or better that Chris anything well mid to high Elevens, Tom I, just want to make sure. The team doesn't run away from this year on their models, but your points are well made I think that.
Christopher R. Cage: Obviously, National Security and Digital. Excellent program execution is what we expect from that team because they've consistently delivered it. And sometimes you're not able to anticipate that you'll knock it out of the park on award fees the way they have continued to do so, but I wouldn't bet against them. So we'll continue to see program execution as a strength there. And as it relates to health, yes, when we started the year, we signaled that the mid-teens was a reasonable expectation for the year.
Speaker Change: We have lines of business that haven't reached their full potential and we're driving them in that direction.
Speaker Change: Capitalizing on the gains we made we're going to continue to invest.
Speaker Change: They added demand. So those are things that we'll have to evaluate where those opportunities are Noah, but clearly you can see this business has a lot of potential and we're going to continue to unlock it.
Speaker Change: Okay.
Speaker Change: And Tom you sound pretty positive and good and proposal it sounds like you're making changes there as well.
Speaker Change: The company has had a lot of growth in.
Speaker Change: All in total backlog number its been kind of flatter on that funded number in the funded book to Bill are your stated book to Bill it's been.
Speaker Change: Recent but.
Speaker Change: <unk> seen higher numbers in the past I guess.
Christopher R. Cage: We've exceeded that. We'll continue to exceed that level through Q2. And I think that even in the second half of the year, there's the possibility and potential that it could be better than that.
Speaker Change: Are you expecting or should we be expecting that those numbers to improve through this year or does it take you a little more time to make any changes you're making on the BNP side.
Speaker Change: Thanks for that and yes, we've put the right team in place to execute the vision for us being a growing business profitably.
Christopher R. Cage: And we'll be able to give you some better color on that as we get closer to the re-compete process. But I would just say that my whole Promises Made, Promises Kept culture never invites overperformance. And so overperformance is welcomed. It is understood as a goal we all look to achieve, and I have every confidence Roy and his team are going to work to overperform both this year and the future.
Speaker Change: Focused on profitable growth and so the pipeline is being refined to go after aggressively the right business not all business you remember one of my sayings not all business is good business and for our lighthouse people understand that message and our are priming the pump of the pipeline accordingly.
Thomas A. Bell: We haven't talked about it yet, but our business development pipeline is very exciting and very robust, and nowhere is it more robust and more exciting than in Roy's business in our national security and digital space. So he and Steve are working very hard to make sure we are positioned to win in the marketplace in the future, not only to deliver results now but to deliver results for the next five years. Great, thank you. And then should we expect hypersonics to drive defense systems growth this year or when the business is changing to limit growth?
Speaker Change: We've got a healthy backlog as you rightly call out I'm not a big fan of these quarterly book to Bill ratios because.
Speaker Change: They are they are a fool's mission.
Speaker Change: Right thing to do is focus on our healthy backlog of profitable growth and we're not embarrassed by the backlog. We've got it's up 4% year over year, and we're looking to improve that as the year goes on we've got a huge pipeline of opportunities in front of us.
Speaker Change: All businesses have robust pipelines of good growth in the latter half of this year. There are a significant number of new and takeaway businesses that we were hoping to brag about on future calls but.
Rocco: Well, hypersonics is one of several areas that we're focused on in our defense systems business. And yes, we're very excited about the capabilities we've proven in our hypersonics programs. And in fact, this week, we're having very robust conversations with customers around where they want to go and how they want to take that technology forward. Obviously, it's a wicked hard problem, but we've got our wicked smart people working to solve it with and for customers. But that's not the only one.
We've got to wait and see on those things.
Speaker Change: Okay.
Speaker Change: Thanks, very much sure. Thanks.
Speaker Change: Thank you one moment for our next question.
Cai von Rumohr: Our next question comes from the line of Cai von <unk> with PD Cowen. Your line is now open.
Cai von Rumohr: Terrific. Thank you very much and.
Cai von Rumohr: Tom Good work on medical exams terrific numbers.
You mentioned.
Cai von Rumohr: That youre approaching the ceiling the medical exams can you tell us approximately when you might hit that ceiling and can you give us any range of timeframe in terms of when we might expect a new RFP yes.
Thomas A. Bell: We've obviously got a lot of expectation with regard to IFPIC Enduring Shield. That program is progressing well through the Army test program this year, and we're very hopeful for an LRIP decision at the end of this year. And, you know, why Field of View Tronch 2?
Cai von Rumohr: Yes Chi this is Chris.
Chris: Again, the team has done great work and we're proud to serve our veterans and it's.
Chris: Ben volumes that the customer Didnt see coming when the original contracts were put in place. So it's the ceiling is structured differently is based upon an exam volume and they've actually had to issue a justification authorization to extend that one's already to.
Thomas A. Bell: While we were disappointed that the prime for our payload wasn't selected, we're working on several avenues to maintain our prowess in that market and serve our nation in its understanding of what's happening from a threat standpoint. So our defense business isn't only hypersonics, but hypersonics is one of those areas, and we're very excited about the suite of capabilities we're currently focused on, necking down to, Thank you.
Chris: To give them time to run this competitive process, we believe that process should play out.
Chris: Over the next couple of quarters and culminate by the end of government fiscal year, if things stay on track.
That's the timeline, we're working towards obviously it is not entirely within our control, but our expectation is we'd have that new contract contractual vehicle in place beginning of our fourth quarter. Obviously, you'll appreciate the fact that our nation can't afford to gap. This critical capability for those who have served us so well.
Operator: One moment for our next question. Our next question comes from the line of Matt Akers with Wells Fargo. Your line is now open.
Chris: We are very appreciative that the veterans administration is working with alacrity around the whole of the system and how they keep.
Matthew Carl Akers: Hey, good morning, guys. Thanks for the question. I wonder if you could comment on the security products business. I think you said in the prepared remarks that there's still work to be done optimizing that. So just curious, you could touch on, I think you're insourcing some products, you talked about that last year, that kind of how big we should think about some of these products that you've decided to exit. Yeah, thanks.
Chris: Serving our veterans adequately and we're very much in dialogue with them to make sure that.
Chris: We're positioned to make sure our veterans continue to be served.
Speaker Change: Got it and so you have done so.
Speaker Change: Way better than most of the other services business.
Speaker Change: Is there any risk or thought that because youre doing so well that the next bids might be structured so that.
Speaker Change: There's not the same profit opportunity because obviously I would assume this is kind of attract lots and lots of bidders or do you have any any visibility at all our thoughts.
Thomas A. Bell: Thanks for that, Matt. We are very, very proud of Vicky and her team and the swift actions they've taken throughout last year and since last year. They're committed.
Speaker Change: How the VA might structure the next RFP.
Speaker Change: I think the long and short answer to that Kai is no. We don't yet they're still working through that themselves, but we feel very confident in the investments. We've made in the facilitation that we've done the technology. We've deployed the team we've assembled that we're in a very good place to compete and continue to serve.
Thomas A. Bell: They're excited about the opportunities they see, and I'm very happy that they're not looking at that world through rose-colored glasses. They are being positively inclined pragmatists, looking at the market for what it is and looking at how we can penetrate that market in the Leidos way to the best degree possible. We did exit certain geographies, as we talked about last year, and we continued to refine the products we're actually offering into the marketplace because we decided those had become commoditized, and they weren't a great place for Leidos to perform.
Speaker Change: Our nation and the Veterans administration.
Speaker Change: Exactly what the rules are and what the incentives are in in the next RFP will be known in time, but whatever the customer decides to do.
Speaker Change: We will adjust accordingly, and continue to work to.
Speaker Change: Make an adequate return on our investment and adequately serve our nations veterans. So we're not deterred by this.
Thomas A. Bell: But while it's still early innings, we're very excited about the business. We're spending a lot of time on the strategy for how and where we will grow that business into the future. And we expect that to be a part of our conversation as the strategy unfolds through the year and into next. Chris, anything you'd add?
Speaker Change: We're actually excited.
Speaker Change: Fact is.
Speaker Change: We are making.
Speaker Change: Robust profits here, because we're serving are veterans so effectively we're doing exactly what the Veteran's administration has incentivized us to do and so it's a good news story and the veterans who get served the quality of care they get coming into <unk> clinic is better than any.
Christopher R. Cage: Matt, I would just add, I mean, we're excited about getting our Charleston facility up and running, and the team's been doing a good job there. Actually, the leadership team will be down there next week to lay eyes on it ourselves. So we're looking forward to seeing that. You know, there are a variety of products.
Speaker Change: And the customer service and the customer reputation. We have is best in class. So we're very excited about it and very eager to continue to serve our nation in this way.
Speaker Change: Terrific. Thanks again.
Okay.
Christopher R. Cage: I won't get into specifics about which ones we're pulling out of the portfolio, but clearly, we're focused on where we have technical differentiation, you know, leadership positions. You know, people screening has been a strength of that business for a long time. You can imagine, you know, that'll be something we continue to stick with and double down on. We have an excellent suite of port and border equipment, but there are some, you know, pockets of the check baggage, checkpoint baggage, et cetera, that we just have to continue to evaluate where we're positioned and make those changes accordingly.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Robert.
Robert Michael Spingarn: Spingarn with Melius Research your line is now open.
Robert Michael Spingarn: Hey, good morning, Rob I Hope you can hear me I'm not this isn't a great connection can you hear me okay.
Robert Michael Spingarn: Okay. Good so Tom I wanted to start with a big picture question and it's about AI you talked about it earlier and this is a little bit more from the industry perspective, but you and your competitors generate 60% or more of your sales from cost plus and.
Robert Michael Spingarn: And time and materials contracts and I'm wondering if the work of consultants can be automated or done more efficiently through AI might that presumably lead to lower costs and reduced billable hours and in that case, how does the value accrue to shareholders rather than all of that efficiency, you're just being passed back to.
Christopher R. Cage: Great, thank you. And then I also want to ask about CapEx, a little bit of a slow start to the year, I might have missed it, but is $190 million still the right way to think about that for this year? And does that sort of ramp up through the year?
Robert Michael Spingarn: The customer.
Robert Michael Spingarn: Rob.
Rob: We're looking at with AI and I mentioned it in my prepared remarks is really becoming that.
Rob: Conduit from commercial best practices, and Jen AI technologies into the government space Youll appreciate.
Matthew Carl Akers: Yeah, Matt, that's still our budget. And you know, there's always a little bit of reserve in there. And you know, we ask the teams to be smart and disciplined, even when we allocate them approvals. But you'll see a few things ramp up. We've got our San Diego facility that we're going to be proud of getting a brand new facility for a lot of our classified work outs in San Diego completed this summer.
Rob: As well as anybody the fact that the government space in the government systems have a whole bunch of idiosyncrasies and complications that people like light OS in light us in particular, no very well so.
Rob: The two examples I cited in my prepared remarks of source graph and move works are two examples of best in class commercial capabilities that we are being able to use to generate outsized productive results for our customers.
Matthew Carl Akers: And the teams are also looking for interesting ways that we can get in front of the customer on unmanned capabilities, demos, testbeds, etc. So we expect that to ramp up a little bit, but we'll continue to manage that tightly. You know, Chris, Chris mentioned San Diego a little bit; I'll just put a spotlight on the great job the team is doing there.
Rob: What that does is it does cut down work in the customer ecosystem, but it allows the people to go do more value added work than just the trite routine repetitive or deeply analytical things that then.
Rob: We team with a human we're very focused on integrating those solutions into our trusted mission AI solutions and then we're very keen that we don't deploy AI and forget we're very focused on our AI solutions being in partnership with the human being never alone and on a.
Christopher R. Cage: We're building a facility that will be world-class in terms of security and up to the latest standards of our nation. And so we'll have facilities on the West coast that are as good as any and better than most, and we're very excited about the conversations and the opportunities that will unlock for us with our customers and the opportunity, therefore, to serve them at the highest classification level. Great. Thank you both.
Speaker Change: Right, Chris anything you'd like to add and Rob. It's a good question. It's a good insight I think we take the view that you've got to play the long game here I mean, if we were worried about maximizing the dollar on the current book of cost plus contracts.
Speaker Change: That'd be a little bit shortsighted, so recognizing that to Tom's point, we can deliver more mission outcome with the same budget and then set ourselves up to be incrementally more competitive on future opportunities.
Thomas A. Bell: Our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is now open. Good morning, everyone. Hey Noah.
Speaker Change: What's going to play well with our customers and that's what's going to keep them coming back to <unk>. So we see this perpetuating our growth momentum as we continue to invest in this capability.
Noah Poponak: So I guess on the margins, the total company EBITDA margin was over 12% in the quarter, despite what you're saying about defense systems and, you know, the back half of last year, kind of mid-elevens with the same thing and a little bit more normal health margin. I guess without even putting a time frame on it, but just as you go forward beyond this year, should we all be thinking of Leidos as a 12% plus EBITDA margin business?
Speaker Change: Okay, Okay, and that's a real interesting answer and then Chris just not so much following on to that but but talking about cost plus again.
Speaker Change: I think if we look at the other side of that I think around 40%.
Speaker Change: Revenues are fixed price, so a pretty meaningful portion and I'm wondering I wanted to ask you about <unk>.
Speaker Change: <unk> backlog the backlog reflects that 40% and other words of similar to the revenue profile.
Noah Poponak: Or is that, you know, getting ahead of ourselves, depending on where health and services break out? Well, no, we're not at the point where we're guiding to 2025 and beyond. But I remember last year, when we were wrapping up the year, we were talking about us being a high tens, high tens business, and people were chastising me for suggesting we might be over 11. Now we're proving we can be over 11, and I'm very eager to see what the full potential of this business is. That's not a commitment to maintain margins at a certain level.
Speaker Change: Is there any portion of that that has pre inflation pricing, where you would get a natural lift in margins as that work rolls off over the next couple of years and things have repriced post inflation, yes, Rob inflation, I get where youre going with that and I mean, there is I'd.
Speaker Change: I'd say theres pockets of that but there is not a pervasive opportunity or concern in our current backlog I mean, a lot of it as we priced our backlog on multiyear jobs, even if it's fixed price we built in some inflationary expectation.
Speaker Change: Some of that for a period of time inflation ran hot but the teams have flexibility on how they execute for those outcomes and so were also motivated to drive efficiencies in our process.
Speaker Change: And each new bid and we're moving forward with we're evaluating them on their own merits and looking for opportunities to make sure. They can generate an attractive return for our shareholders. So feel good about our backlog and feel good about our pipeline and where that helps support our margin objectives over time.
Thomas A. Bell: We're going to make smart decisions. We're not going to get locked into certain preconceived notions of where we want to go, but better is always good, and we want to bank those gains and expand and exploit other areas to grow the business. So as we've guided this year, high 11s is our commitment to you in 2024, and as we pursue 2025, we'll be very eager to see if we can meet or better that. Chris, anything? Well, mid to high 11s, Tom.
Speaker Change: Great. Thanks for the help.
Speaker Change: Operator, it looks like we only have time for one more question.
Speaker Change: Our final question comes from the line of Jason Gursky with Citi. Your line is now open.
Jason Michael Gursky: Great Good morning, everybody.
Speaker Change: Yes.
Jason Michael Gursky: Tom You mentioned.
Jason Michael Gursky: During the quarter and then here again on the call today, the Munich Security conference in.
Jason Michael Gursky: The summer event that it was.
Jason Michael Gursky: I'm just curious from.
Jason Michael Gursky: From a demand perspective coming out of Europe kind of what you.
Jason Michael Gursky: <unk> are seeing these days and how do you go about.
Christopher R. Cage: I just want to make sure the team doesn't run away from us here on their models, but no, your points are well made. I think that we have lines of business that haven't reached their full potential, and we're driving them in that direction and capitalizing on the gains we've made. We're going to continue to invest to stay ahead of demand, so those are things that we'll have to evaluate where those opportunities are, Noah, but clearly, you can see this business has a lot of potential, and we're going to continue to unlock it.
Jason Michael Gursky: Taking advantage of the demand signals that you're.
Jason Michael Gursky: Staying in Europe at this point, given where you operate.
Jason Michael Gursky: On that side of.
Jason Michael Gursky: The pond so to speak.
Jason Michael Gursky: What kinds of.
Jason Michael Gursky: Programs, you might be chasing over them.
Speaker Change: Thank you Jason Yes, it was a somber sobering affair.
Speaker Change: For those of you who havent picked up.
Jason Michael Gursky: The magazine that they published at the beginning the title of the conference was lose lose question Mark.
Jason Michael Gursky: So that gave gives you a sense of.
Jason Michael Gursky: The tone.
Jason Michael Gursky: Earlier, this year and I don't think that that has.
Christopher R. Cage: Okay. And Tom, you sound pretty positive about the bid and proposal. It sounds like you're making changes there as well. You know, the company's had a lot of growth in the all-in-total backlog number, but it's been kind of flatter on that funded number and the funded book to bill or your stated book to bill, it's, you know, decent, but. It's seen higher numbers in the past, I guess. Are you expecting, or should we be expecting, those numbers to improve this year? Or does it take you a little more time to make any changes you're making on the BNP side?
Jason Michael Gursky: I've become any more joyful.
Jason Michael Gursky: They are all.
Jason Michael Gursky: 201, increasing defense budgets robustly. So there is certainly top line growth happening in Europe, but more importantly than that my personal hypothesis is that we're going to see defense expenditures globally more from hardware to more systems. So.
Jason Michael Gursky: <unk> and factors.
Jason Michael Gursky: I beg your pardon for those words, but.
Jason Michael Gursky: Systems integrated solutions and effectors not so much the.
Jason Michael Gursky: The platform that launches the product, but the actual.
Jason Michael Gursky: Factor for for defense, and so light OS is particularly well positioned to serve that market not only because we've got a robust presence in Europe already anchored in the U K, but throughout Europe, but also.
Noah Poponak: Thanks for that. And yes, we've put the right team in place to execute the vision for us being a growing business profitably, focused on profitable growth. And so the pipeline is being refined to go after aggressively the right business, not all business. You remember one of my sayings; not all business is good business.
Jason Michael Gursky: Because as I look at that shift in spend not only the increase in topline, but the shift to products services and solutions in our sectors from.
Jason Michael Gursky: From products to solutions services, and the factors I IC light us in the unique.
Thomas A. Bell: And for Leidos, people understand that message and are priming the pump of the pipeline accordingly. We've got a healthy backlog, as you rightly call out. I'm not a big fan of these quarterly book to bill ratios because they are a fool's mission.
Jason Michael Gursky: Opportunity to help our customers prosecute those needs I mentioned in August what August pillar. Two is all about seamless information sharing AI automate autonomy advanced cyber hypersonic electronic warfare and I mentioned.
Thomas A. Bell: The right thing to do is focus on a healthy backlog of profitable growth, and we're not embarrassed by the backlog we've got. It's up 4% year over year, and we're looking to improve it as the year goes on. We've got a huge pipeline of opportunities in front of us. All businesses have robust pipelines of good growth, and, yeah, in the latter half of this year, there are a significant number of new and takeaway businesses that we're hoping to brag about on future calls, but we've got to wait and see on those things. Okay. Thanks very much.
Jason Michael Gursky: This reads like a catalog of lighthouse capabilities and strengths. So I think we're uniquely positioned.
Jason Michael Gursky: Fact that the U S is talking about lowering the IRR hurdles between the U S and the UK as a part of all of this allows us to position ourselves even more forcefully to serve our our UK customers in ways. We have been inhibited from doing before and I think that gives us.
Jason Michael Gursky: So launching off point to talk to the Baltics around undersea capabilities to talk to all about integrated air defense capabilities to talk to all about electronic warfare capabilities. It's just it just gives us the launching point to have much more robust conversations than we've been able to have.
Operator: Sure thing. Thanks, Noah. Thank you. One moment for our next question. Our next question comes from the line of Cai Von Rumohr with T.D. Cowan.
Jason Michael Gursky: Before and again, our commercial and international segment now all aligned to have all of those customer touch points aggregated into one place. So we can more adroitly connect them and prosecute them with a whole of light us approach.
Cai von Rumohr: Your line is now open. Terrific. Thank you very much. Good work on the medical exams. Terrific. So you mentioned that, you know, you're approaching the ceiling on the medical exams. Can you tell us approximately when you might hit that ceiling? And can you give us any range of timeframe in terms of when we might expect a new RFP? Yeah, Cai. This is Chris.
Jason Michael Gursky: Really think is an exciting time for lightest. So early days they are still doing a little storm an enormous about those budgets and how they're going to do it but we're not going to be.
Jason Michael Gursky: Hardy.
Jason Michael Gursky: And say, it's all got to be us where.
Jason Michael Gursky: We also are humble partners in these things so we're working to find out who we might want to partner with in Europe to prosecute these even better and work with National Champions as a result, so it's a very exciting opportunity, but early days yet.
Christopher R. Cage: You know, again, the team's done great work, and we're proud to serve our veterans. And it's volumes that the customer didn't see coming when the original contracts were put in place, so the ceiling is structured differently.
Speaker Change: Alright, okay.
Speaker Change: That's great appreciate the color on that and then just the last one.
Christopher R. Cage: It's based on exam volume, and they've actually had to issue a justification authorization to extend that once already to give them time to run this competitive process. We believe that process should play out. Over the next couple quarters and culminate, you know, by the end of the government fiscal year, if things stay on track. That's the timeline we're working towards. Obviously, it's not entirely within our control, but our expectation is we'd have that new contract contractual vehicle in place by the beginning of our fourth quarter. Obviously, Cai, you'll appreciate the fact that our nation can't afford to gap this critical capability for those who have served us.
Speaker Change: On the pipeline that you.
Speaker Change: Have in front of you here domestically, maybe you could just talk about what youre seeing from a competitive perspective.
Jason Michael Gursky: Here of late.
Jason Michael Gursky: Just general trends on on the competitive environment would be great. Thanks.
Jason Michael Gursky: So we're we're doing reasonably well in defending the work we have our re competes and on contract growth as is.
Speaker Change: Good and we are very happy with our performance there.
Speaker Change: Retooling in our business capture and growth areas is all about.
Speaker Change: Going after.
Speaker Change: The big game, and making sure we put ourselves in a position to.
Speaker Change: Two robustly prosecute new opportunities for lighthouse I feel very good about the team we've got I've got Barry.
Thomas A. Bell: And so we are very appreciative that the Veterans Administration is working with Alacrity around the whole of the system and how they keep serving our veterans adequately. And we're very much in dialogue with them to make sure that we're positioned to make sure that our veterans continue to be served.
Speaker Change: The pipeline is actually stoked with those kind of takeaway opportunities and there's many that are well over $1 billion. So.
Speaker Change: We're seeing ample.
Speaker Change: Ample opportunities for light owes to differentiate itself in competitions, and we're seeing ample customer uptake on the kinds of things that lighthouse does best Paris anything you'd like to call. Jason just quickly I mean, I would say that certainly best value award decisions are the trend we continue to see.
Cai von Rumohr: And so, you know, you've done this way, you know, way better than most of the other services businesses. Is there any risk or thought that, you know, because you're doing so well, that the next bids might be structured so that, you know, there's not the same profit opportunity? Because obviously, I would assume this has got to attract lots and lots of bidders. Or do you have any visibility at all or thoughts about how the VA might structure the next RFP? I think the long and short answer to that, Cai, is no, we don't yet.
Speaker Change: I'm not seeing any creative and not crazy items in the competitive set is pretty well known and understood. We pay a lot of attention to that oftentimes. It just comes down to are you writing a compelling proposal getting clarity of what your solution and do you have the unparalleled customer understanding that you need to really hit the mark on the things that they're looking for that might not have jumped out.
Speaker Change: And the <unk>. So we think we're doing that well, we think we're focused on adding talent and depth in our account management structure to continue to do that well.
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Thomas A. Bell: They're still working through that themselves. But we feel very confident in the investments we've made and the facilitation that we've done, the technology we've deployed, the team we've assembled, that we're in a very good place to compete and continue to serve our nation and the Veterans Administration. Exactly what the rules are and what the incentives are in the next RFP will be known in time, but whatever the customer decides to do, we'll adjust accordingly and continue to work to make an adequate return on our investment and adequately serve our nation's veterans. So we're not deterred by this. We're actually excited.
Speaker Change: Perfect. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: This concludes the Q&A portion I will now turn the call back over to Stuart Davis for closing remarks.
Stuart Davis: Thank you operator for your assistance on this morning's call and thank you all for your time this morning, and your interest in light US we look forward to updating you again soon have a great day.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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Thomas A. Bell: The fact is, we are making robust profits here because we're serving our veterans so effectively. We're doing exactly what the Veterans Administration has incentivized us to do. And so it's a good news story. And the veterans who get served, the quality of care they get coming into a Leidos QTC clinic is better than any.
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Thomas A. Bell: And the customer service and the customer reputation we have is best in class. So we're very excited about it and very eager to continue to serve our nation in this way. Terrific. Thanks again.
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Operator: Thank you. One moment for our next question. Our next question comes from the line of Robert Spingarn with Melius Research.
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Robert Michael Spingarn: Your line is now open. Hey, good morning. I hope you can hear me. I've I'm not. This isn't a great connection. Can you hear me?
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Robert Michael Spingarn: Okay. Yeah, good. Okay, good. So Tom, I wanted to start with a big picture question. And it's about AI; you talked about it earlier. And this is a little bit more from the industry perspective, but you and your competitors generate 60% or more of your sales from cost plus and Time and Materials contracts. And I'm wondering if the work of consultants can be automated or done more efficiently through AI, might that presumably lead to lower costs and reduced billable hours? And in that case, how does the value accrue to shareholders, rather than all of that efficiency just being passed back to the customer?
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Thomas A. Bell: Rob, what we're looking at with AI, and I mentioned it in my prepared remarks, is really becoming that conduit from commercial best practices and next-gen AI technologies into the government space. You'll appreciate, as well as anybody, the fact that the government space and the government systems have a whole bunch of idiosyncrasies and complications that people like Leidos, and Leidos in particular, know very well. So the two examples I cited in my prepared remarks, Sourcegraph and Moveworks, are two examples of best-in-class commercial capabilities that we're being able to use to generate outsized, productive results for our customers.
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Thomas A. Bell: What that does is it does cut down work in the customer ecosystem, but it allows people to go do more value-added work than just the trite, routine, repetitive, or deeply analytical things that then we team with a human. We're very focused on integrating those solutions into our trusted mission AI solutions, and we're very keen that we don't deploy AI and forget. We're very focused on our AI solutions being in partnership with the human being, never alone and unafraid. Chris, anything you'd like to add to that? Yeah, well, and Rob, it's a good question.
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Christopher R. Cage: It's a good insight. I think we take the view that you have got to play the long game here. I mean, if we were worried about maximizing the dollar on the current book of cost-plus contracts, you know, I think that'd be a little bit shortsighted.
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Christopher R. Cage: So, recognizing that, to Tom's point, we can deliver more mission outcomes with the same budget and then set ourselves up to be incrementally more competitive on future opportunities, that's what's going to play well with our customers, and that's what's going to keep them coming back to Leidos. So, we see this perpetuating, you know, our growth momentum as we continue to invest in this capability. Okay, okay. And that's a really interesting answer.
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Robert Michael Spingarn: And then Chris, just not so much following on to that, but talking about cost plus, again, I think if we look at the other side of that, I think around 40% of revenues are fixed price. So, a pretty meaningful portion. And I'm wondering, I want to ask you about stale backlog. You know, if the backlog reflects that 40%, in other words, it's similar to the revenue profile, is there any portion of that that has pre-inflation pricing, where you'd get a natural lift in margins as that work rolls off over the next couple of years and things are repriced post-inflation? Yeah, Rob, I get where you're going with that.
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Christopher R. Cage: And I mean, I'd say there are pockets of that, but there's not a pervasive opportunity or concern in our current backlog. I mean, a lot of it, as we priced our backlog on multi-year jobs, even if it's a fixed price, we built in some inflationary expectations. You know, some of that for a period of time, inflation ran hot, but the teams have flexibility on how they execute for
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Christopher R. Cage: And so we're also motivated to drive efficiencies in our process. And each new bid that we're moving forward with, we're evaluating them on their own merits and looking for opportunities to make sure they can generate an attractive return for our shareholders. So I feel good about our backlog and feel good about our pipeline and how that helps support our margin objectives over the next couple of years. Great, thanks for the help.
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Robert Michael Spingarn: Operator, it looks like we only have time for one more question. Thank you. Our final question comes from the line of Jason Gursky with Citi. Good morning, everybody.
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Jason Michael Gursky: Hey, Tom, you mentioned during the quarter and then here again on the call today the Munich Security Conference and the somber event that it was. I'm just curious, from a demand perspective coming out of Europe, kind of what you at Leidos are seeing these days, and how do you go about taking advantage of the demand signals that you're, Unknown Speaker at this point, given where you operate on that side of the pond, so to speak, and what kinds of programs you might be chasing over there. Thank you, Jason. Yeah, it was a somber, sobering affair.
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Thomas A. Bell: You know, for those of you who haven't picked up the magazine that they published at the beginning, the title of the conference was Lose Lose, question mark? So that gives you a sense of the tone earlier this year, and I don't think that it has become any more joyful. They are all, 201, increasing defense budgets robustly. So there is certainly top-line growth happening in Europe. But more importantly than that, my personal hypothesis is that we're going to see defense expenditures globally morphed from hardware to more systems, solutions, and effectors. Beg your pardon for those words, but systems, integrated solutions, and effectors, not so much the platform that launches the product but the actual effector for defense.
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Thomas A. Bell: And so Leidos is particularly well positioned to serve that market, not only because we've got a robust presence in Europe already, anchored in the UK, but throughout Europe, but also because as I look at that shift in spend, not only the increase in the top line but the shift from products to solutions, services, and effectors from products to solutions, services, and effectors, I see Leidos as having the unique opportunity to help our customers meet those And I mentioned in AUKUS what AUKUS Pillar 2 is all about: seamless information sharing, AI, autonomy, advanced cyber, hypersonics, and electronic warfare. And I mentioned, I mean, this reads like a catalog of Leidos' capabilities and strengths.
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Thomas A. Bell: So I think we are uniquely positioned. The fact that the US is talking about lowering the ITAR hurdles between the US and the UK as part of all of this allows us to position ourselves even more forcefully to serve our UK customers in ways we have been inhibited from doing before. And I think that gives us a launching point to talk to the Baltics about undersea capabilities, to talk to everyone about integrated air defense capabilities, to talk to everyone about electronic warfare capabilities.
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Thomas A. Bell: It just gives us the launching point to have much more robust conversations than we've been able to have before. And again, our commercial and international segment now all aligned to have all those customer touch points aggregated into one place so we can more adroitly connect them and prosecute them with a whole of Leidos approach. I just really think it's an exciting time for Leidos. So in the early days, they're still doing a little storming and norming about those budgets and how they're going to do it. But you know, we're not going to be...
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Tom Bell: Okay.
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Thomas A. Bell: Haughty, and say it's all got to be us. We also are humble partners in these things, so we're working to find out who we might want to partner with in Europe to pursue these even better and work with national champions as a result. So it's a very exciting opportunity, but it's early days yet. Right. Okay. That's great. Appreciate the color on that. And then just the last one.
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Jason Michael Gursky: On the pipeline that you have in front of you here, domestically, maybe you could just talk about what you're seeing from a competitive perspective here in terms of weight and just general trends in the competitive environment would be great. Yeah, so we're doing reasonably well in defending the work we have. Our re-competes and on-contract growth is good, and we are very happy with our performance there. The re-tooling in our business capture and growth areas is all about going after the big game and making sure we put ourselves in a position to robustly pursue new opportunities for Leidos. I feel very good about the team we've got. The pipeline is actually stoked with those kinds of takeaway opportunities, and there are many that are well over a billion.
Thomas A. Bell: Okay.
Jason Michael Gursky: Okay.
Jason Michael Gursky: Yes.
Jason Michael Gursky: Great.
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Jason Michael Gursky: Yes.
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Jason Michael Gursky: Yes.
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Jason Michael Gursky: Okay.
Jason Michael Gursky: Thanks.
Jason Michael Gursky: Okay.
Jason Michael Gursky: Okay.
Thomas A. Bell: So we're seeing ample opportunities for Leidos to differentiate itself in the competition, and we're seeing ample customer uptake on the kind of things that Leidos does best. Chris, anything you'd like to call out? Yeah, Jason, just quickly, I'd say that certainly best value award decisions are the trend we continue to see, and you know, I'm not seeing any crazy Ivans, and the competitive set is pretty well known and understood. We pay a lot of attention to that.
Jason Michael Gursky: Yes.
Jason Michael Gursky: Okay.
Thomas A. Bell: Yes.
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Thomas A. Bell: So.
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Thomas A. Bell: Oftentimes, it just comes down to are you writing a compelling proposal, getting clarity on your solution, and do you have the unparalleled customer understanding that you need to really hit the mark on the things that they're looking for that might not have jumped out in the RFI?
Thomas A. Bell: Okay.
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Thomas A. Bell: Yes.
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Thomas A. Bell: Thanks.
Christopher R. Cage: So we think we're doing that well. We think we're focused on adding talent and depth to our account management structure to continue to do that well, and we like what we're positioned for. Perfect. Thanks, guys. Thank you. This concludes the Q&A portion. I'll now turn the call back over to Stuart Davis for closing remarks. Thank you, operator, for your assistance on this morning's call and thank you all for your time this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day! This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
Thomas A. Bell: Okay.
Thomas A. Bell: Great.
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Stuart Davis: Unknown Executive, Noah Poponak, Mariana Mora, Michael DiPalma, Thomas Bell, Leidos Holdings Inc Unknown Executive, Noah Poponak, Mariana Mora, Michael DiPalma, Thomas Bell, Leidos Holdings Inc, Unknown Executive, Robert Spingarn, Robert Poponak, Leidos Holdings Inc, Unknown Executive, Robert Poponak, Robert Seifman, Robert Spingarn, Michael DiPalma, Unknown Executive, Robert Seifman, Unknown Executive, Robert Seifman, Unknown Executive, Robert Seifman, Unknown Executive, Robert Seifman, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? © The Ultimate Parody Site! ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? music music music music music music music music music music music music music music music music music music music music music music, Copyright © 2020 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent.
Christopher R. Cage: Yes.
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