Q3 2024 Leidos Holdings Inc Earnings Call
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Speaker Change: Greetings. Welcome to Light O'Stirch Quarter, 2024 earnings call. At this time, Albert Desmond's on-alist and only mode. A brief question and answer session will follow the former presentation. Please note, this conference is being recorded. At this time, Albert Desmond's on-alist relations. Let's start.
Speaker Change: Thank you and good morning everyone. I'd like to welcome you to our third quarter, fiscal year 2024 earnings conference call. Joining me today are Tom Bell, our CEO, and Chris Cage, our Chief Financial Officer.
Speaker Change: Today's call is being webcast on the investor relations portion of our website. Where you will also find the earnings release and supplemental financial presentations slides that will use during today's call.
Speaker Change: 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.
Speaker Change: Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Speaker Change: Finally, as shown on slide three, during the call we'll discuss gap and non-gap financial measures. A reconciliation between the two is included in today's press release and presentation slides.
Speaker Change: with that I'll turn the call over to Tom Bell, we'll begin on slide four.
Tom Bell: Thank you, Stuart and good morning, everyone. As always, it's great to be with you all again today.
Tom Bell: This morning I'm very happy to report our sixth straight quarter of excellent financial performance. And I'm also very proud of the fact that the team has delivered high quality wins and across the entire Lighthouse portfolio.
Tom Bell: As a result of this strong sustained financial performance, our growing business capture momentum and our increased clarity into important light-os markets.
Tom Bell: We are again raising our forward guidance for 2024 across all metrics.
Tom Bell: Chris will provide full details regarding our outstanding financial performance and our improved 2024 guidance later on this call.
Tom Bell: This quarter's solid organic growth and industry leading margins enabled us to deliver substantial earnings growth and free cash flow.
Tom Bell: with record adjusted EBITDA margin of 14.2% we've now achieved 12.9% EBITDA over the trailing 12 months.
Tom Bell: This excellent execution performance is the result of our robust portfolio of program-serving customer priority missions, our investments to drive efficiency, and the teams embrace of a promises made promises kept velocity throughout our capability-based organization.
Tom Bell: Our performance in this quarter reflects a just-deluted EPS growth of 44% and free cash flow conversion of 159%.
Tom Bell: Our outstanding cash collections this quarter also enabled us to accelerate share repurchases.
Tom Bell: We purchased $200 million worth of shares on the open market, thereby clearing $450 million of our 500 million plan share repurchases for the year.
Tom Bell: As a result of our sustained performance in our conviction regarding our portfolios on going earnings cat and cash profile, we have again increased our quarterly dividend.
Tom Bell: Shareholders of record on December 16th, or receive a dividend of 40 cents a share, a 5.3% increase over our past dividend.
Tom Bell: The balance sheet strengthening we've undertaken over the past 18 months gives us excellent optionality.
Tom Bell: And this will be important as we begin to focus more capital in the future on our new North Star Gross Strategy.
Tom Bell: But for the remainder of this year, uses of capital will continue to be prudently focused on the potential for additional share of purchases and purposeful down payments on specific growth engines that have come into focus as a part of our new North Star strategy.
Tom Bell: We look forward to sharing more detail about our new North Star strategy and its suite of compelling light-os growth engines at our upcoming investors day in March.
Tom Bell: Starting today, I'll take the opportunity from time to time to highlight one of our compelling light-os growth engines.
Tom Bell: Today I'll start this practice within overview and update on our health and civil segment.
Tom Bell: Over the past year, our Health and Civil segment has been a growth in margin leader for us.
Tom Bell: Our team in Health and Civil is executing extremely well.
Tom Bell: and within this newly formed segment, they are optimizing performance across their broad portfolio and in doing so they are leveraging the synergies of the complete set of scientific experts we employ, what we refer to as our oligists.
Tom Bell: who come to light us to break limits in their careers and deliver superior results for our customers.
Tom Bell: We're seeing strong performance and positive developments across the full array of health and civil customers.
Tom Bell: Including our work for NASA, the National Institutes of Health, the various customers of our air traffic management systems, and our virtual health solutions customers.
Tom Bell: One area of this segment that I know many of you track is managed health services, where we bring truly differentiated solutions to our customers, which in turn unlock truly differentiated performance.
Tom Bell: K. Currently, a core offering within our managed health services is disability and occupational health evaluations for a wide range of customers, including the Department of Labor, the FBI, and the US Secret Service.
Tom Bell: Included in these flagship programs, we perform medical disability examinations for veterans and active duty members preparing to discharge.
Tom Bell: Exam, volumes for this business have remained elevated based on the permanent increase in the eligible population from the promise to address comprehensive toxins act, better known as the Pact Act, sign into law in August of 2022.
Tom Bell: because of our continued ahead of the curve investments in this business.
Tom Bell: with AI, virtual health and other key technology navelers, and investing in overall capacity. We're positioned to continue to respond with quality and speed to the increased volumes and complexity of exams, the PAC DAC creates.
Tom Bell: As an example, we've continued to expand our fleet of mobile clinics to meet the needs of underserved veteran populations.
Tom Bell: These include those living in rural communities, tribe members on Indian reservations, and homebound veterans.
Tom Bell: and to assist our veterans beyond our own light os qtc clinics, we've developed cutting edge core coordination processes and algorithms for the VA.
Tom Bell: These help the VA optimize their use of their critical imaging systems, such as CT scan machines, to ensure veterans are receiving quality and timely healthcare across the whole of the care ecosystem.
Tom Bell: I'm exceptionally proud of our performance for the VA and for our nation's veterans. And we are focused on working with the VA to continue to drive down case backlog and deliver timely exceptional service to veterans and service members.
Tom Bell: On our last earnings call, I relayed that volume and profitability of this business might be challenged in the second half of this year.
Tom Bell: I expressed this caution at that time because of the real customer budget challenges and the lack of clarity regarding an upcoming recon feat for some of our work.
Tom Bell: Consistent with our promises made promises kept philosophy. We issued improved guidance then that was proven given the uncertainty at that time.
Tom Bell: I'm happy to report that we now have much greater clarity on both these fronts.
Tom Bell: First Congress approved a $3 billion supplemental funding request by the VA for the government's fiscal year 2024.
Tom Bell: and this was passed with clear bipartisan support.
Tom Bell: So we fully expect Congress to approve the VAs $12 billion request for fiscal year 2025.
Tom Bell: and second, the VBA has already exercised the option year contained in our current region's contract.
Tom Bell: In addition, we've submitted what we believe to be a compelling bid for a new two-year contract for this same work.
Tom Bell: and we expect to receive a contract award for this important work in the coming weeks.
Tom Bell: We very much look forward to continuing our longstanding partnership with the VA in service to our nation's veterans.
Tom Bell: With this current option year in hand and the new two year contract ahead, we are very confident in the ongoing financial performance of this business.
Tom Bell: We expect the volume and margins of our future work here to be sustained on the faculty investments we've made and continue to make in throughput and quality.
Tom Bell: and looking beyond this new two-year award, we remain confident in our ability to continue to differentiate our nation and its veterans.
Tom Bell: The VBA is encouraging offers to drive even more innovation into veteran services before they award the next set of long-term contracts. And this plays to our strengths.
Tom Bell: with our scale and technical depth, our investments in cutting-edge trusted mission AI and the talent and mission focus of our team. We are poised to demonstrate our ability to handle even greater volumes of exams with excellent quality, timeliness, and better in customer satisfaction.
Tom Bell: Turning now to business development, as you know, we've been focused on fundamentally resetting our future performance expectations by improving the size and quality of our backlog.
Tom Bell: This third quarter yielded an excellent return on this focus with net bookings of 8.1 billion, representing a book-to-bill ratio of over 1.9 times.
Tom Bell: We ended the quarter with a total backlog of $40.6 billion, including $9.1 billion of funded backlog. And importantly, I'm very pleased with the improved quality of this future work.
Tom Bell: Quality wins this quarter were balanced across all our segments, but the rich mix of new growth drivers. Here is a sampling.
Tom Bell: We won over 700 million in new and take away wins in full spectrum cyber. This is a testament to our capability and competitiveness in this market.
Tom Bell: It's also an early success from the investments we've made in repeatable solutions in our digital modernization sector.
Tom Bell: A couple of P.O.W.s to mention this quarter include developing the Army's new General Unified Network to deliver a next-gen transport capability compliant with zero trust principles.
Tom Bell: and we want a large, classified takeaway contract for a member of our intelligence community.
Tom Bell: The Air Force tapped light-os as its digital integrator to oversee planning, analysis and operations, of its advanced battle management system digital infrastructure network, a core component of the Air Force Battle Network.
Tom Bell: This comprehensive network links together all Air Force assets, allows for optimal coordination between different units and enables commanders to respond rapidly to the changing situations on the battlefield.
Tom Bell: The $300 million award augments are growing portfolio of combined joint all-domain command and control programs.
Speaker Change: and we had $1.7 billion of net bookings within our defense system segments.
Speaker Change: for collecting our maturing product portfolio there on if pick and during shield we received an award for additional development work and for more launchers after government lead development tests successfully intercepted a mix of unmanned and cruise missile targets.
Speaker Change: This means we remain on track to receive a low rate production contract in 2025 and a full rate production contract in 2026.
Speaker Change: We finalized our contract to provide wide field-to-view trunch-to-satellite payloads. This means we will continue to serve our nation with payloads on the FDA's trunch-0, 1, and 2 satellites.
Speaker Change: We received a contract from the U.S. Special Operations Command to restart production of our Small Live Initiatives program.
Speaker Change: This program blossomed a decade ago from a cooperative research and development agreement or CREDA, and we've now delivered more than 4,000 units.
Speaker Change: of note, we're also on creative for a next generation small cruise missile system called Black Arrow. Recently, Black Arrow completed multiple tests at customer ranges, and will undertake even more advanced flight tests this fall.
Speaker Change: We believe that Black Arrow will help meet the DOD's critical need for affordable stand-off strike systems that can be quickly produced and fielded in volume.
Speaker Change: It's encouraging to see these and other significant results from our focus on growth across our entire portfolio.
Speaker Change: The third quarter was also marked by high volumes of proposal submissions.
Speaker Change: So looking forward, even with the large number of few three awards.
Speaker Change: Our pipeline of bids awaiting a due to cation grew by $3 billion and now stands at $29 billion at the end of the quarter. We believe this position is us very well for even greater business capture performance in the future.
Speaker Change: As referenced earlier in our conversation, because of the hard work that the team has put into our year of deep strategic thinking, our new North Star strategy has come into clear focus.
Speaker Change: from the Colitis Group of Opportunities in front of us. I can confidently say that the rigorous process we have undertaken has unveiled an exciting set of focused opportunities for us to accelerate light-os growth. Top line, bottom line and cash over the coming years.
Speaker Change: That path forward and the compelling financial picture it will spawn will be the focus of our March 2025 investors day.
Speaker Change: I'll now turn the call over to Chris to walk through our financial results in detail and provide additional insight into our improved outlook.
Speaker Change: Chris?
Chris Cage: Thanks, Tom, and thanks to everyone for joining us today.
Chris Cage: are third quarter results again, showcase what is possible as we lower performance risk, focus on high quality wins, and drive efficiency through the organization.
Chris Cage: This team is laser-focused on sustainably growing earnings and cash, and deploying them responsibly to grow shareholder value.
Chris Cage: Turn into the income statement on fly-five.
Chris Cage: Revenue for the third quarter were 4.19 billion, up 7% year over year.
Chris Cage: Customer demand remains robust and employee retention remains historically high.
Chris Cage: Margin performance was once again a standout in the quarter.
Chris Cage: A just a diva dog of 596 million was up 32% year over year. And a just a diva dog margin increased 270 basis points to 14.2%. A new high water mark for lightos.
Chris Cage: Programme level execution was one catalyst for margin performance.
Chris Cage: EAC adjustments were a 30 million net positive, our best performance in nearly four years.
Chris Cage: Non-Gap net income was $396 million, and non-Gap deleted EPS was $2.93, a 40% and 44% respectively.
Chris Cage: On a year over year basis, our slightly higher tax rate in the quarter fully offset our slightly lowered deluded share count and net interest expense.
Chris Cage: [inaudible]
Chris Cage: and Presentation Appendix, you'll see 6 million of gap impairment charges from exiting and consolidating underutilized lease spaces.
Chris Cage: and we expect another 15 million or so of charges associated with additional actions over the next five quarters.
Chris Cage: Or closely managing our corporate costs and lowering our real estate footprint improves our competitiveness and keeps corporate costs in check.
Chris Cage: The annualized savings from these actions will be in the neighborhood of 25 to 30 million, which we'll see the full benefit of in 2026.
Chris Cage: Learning to the segment view on slide 6.
Chris Cage: National Security and Digital Revenue's increased 1% year of the year.
Chris Cage: We saw volumes grow broadly across our digital modernization portfolio, which offset slowness across several intelligence community programs.
Chris Cage: I'm very pleased with the margin discipline of the segment as they continue to perform ahead of plan.
Chris Cage: National Security and Digital, non-Gap operating income margin, increase 70 basis points from the prior year quarter to 10.5%.
Chris Cage: This was their highest margin of the year, and it reflects early success in digital modernization repeatability and utilization initiatives, as well as excellent award fees on our intelligence community programs.
Speaker Change: As Tom alluded to earlier, Health and Civil continued to deliver for customers and shareholders.
Speaker Change: Revenu is increased 16% over the prior year quarter and non-gap operating in margin came in at 24.2% up from 16.5% a year ago.
Speaker Change: Revenue and margin over performance was primarily in the Manage Health Services for Bolio, the Tom Spotlighted. As we received more disability exam requests and anticipated, and our differentiated solutions were able to unlock higher performance and incentives.
Speaker Change: Proffordability was roughly in line with Q2 levels.
Speaker Change: Commercial and International Revenue is increased 5% with increased deliveries of security products and energy engineering services.
Speaker Change: Nongap operating margins were 8.8% their highest level this year.
Speaker Change: The UK Business was a positive top end bottom line contributor in the quarter, and I'm pleased with the positive trajectory for this business area and the segment overall.
Speaker Change: Finally, defense systems revenues increase 13% over the prior year quarter and non-gap operating margins increase 280 basis points year of year to 10.2%.
Speaker Change: is rewarding to see the kind of financial performance that we expected from this portfolio.
Speaker Change: There were many bright spots in the segment highlighted by the move to the initial operating test and evaluation stage on if taken during shield.
Speaker Change: Looking across the segments, clearly health and civil continued its strong execution, but I'm most encouraged by the broad-based strength of the entire portfolio. We had two sectors growing at double digits for the first time in the new organization structure.
Speaker Change: and if you set health and civil aside, margins for the remaining three segments were up 80 basis points from a year ago and higher than they've been as far back as we have recast financials.
Speaker Change: and the Bale and Chee on Flight 7.
Speaker Change: with the end of the government fiscal year, we had exceptional cash performance. We generated $656 million of cash flows from operating activities and $633 million of free cash flow.
Speaker Change: In Q3, we were purchased the total of 203 million shares, including 200 million on the open market and paid 51 million in dividends.
Speaker Change: We ended the quarter with 1.2 billion in cash and cash equivalents and 4.7 billion of debt. We have significant capacity to return cash to shareholders and invest in growth.
Speaker Change: Next, I'll go through our enhanced outlook for 2024 on Slide 8.
Speaker Change: We're raising and narrowing our revenue guidance range to 16.35 to 16.45 billion and increase of 150 million at the midpoint.
Speaker Change: We're increasing adjusted even though guidance from approximately 12% to the high 12% range.
Speaker Change: We're raising and narrowing our non-gap the Litter DPS guidance range to $9.80 to $10, which is an increase of $1.10 at the midpoint.
Speaker Change: and lastly, we're increasing our guidance for operating cash flow by 50 million to approximately 1.35 billion for the year.
Speaker Change: Our new guidance reflects not just the outperformance in the third quarter, but also an improved outlook for the fourth quarter, spurred by positive momentum across all four segments and increasing visibility in our health and civil segment through the recompete of the region's contracts.
Speaker Change: As you put together your models, we're expecting fourth quarter interest expense, tax rate and diluted share count to remain near Q3 levels.
Speaker Change: We plan to step up CapEx investments tied to growth in Q4 and end the year at 160 million or about 30 million below our original expectations for the year.
Speaker Change: Finally, as Tom indicated, our year of deep strategic thinking has brought our North star strategy into clear focus.
Speaker Change: We're not yet ready to give next year's guidance or new long-term targets, but I want to orient you to our current thinking.
Speaker Change: are very strong performance in 2024 raises the bar for next year.
Speaker Change: The midpoint of our revised guidance range yields revenue growth of 6% and deluded EPS growth of 36% in 2024. At this point, we're not expecting to repeat quite that same level of growth in 2025.
Speaker Change: We see 2025 as the pivot year from the company we are to the company we're building towards as we implement our strategy.
Speaker Change: We currently expect revenue growth in 2025 to be in the lower single digits with the longer term growth outlook potentially back to 2024 levels or above.
Speaker Change: Most importantly, we are committed to remate retaining margins near current levels and robustly and sustainably growing diluted EPS over time.
Speaker Change: With that, operator will ready to take questions.
Speaker Change: Thank you.
Speaker Change: We will now begin the question and answer session. To ask a question you may press star, one, one on your touch phone phone. If you are using a speaker phone, please pick up your handset before pressing the keys.
Speaker Change: Do we enjoy a question simply press star one one again? Please limit yourself to one question before getting back into the queue.
Speaker Change: And our first question coming from the line of Peter Armand with Bear, the line of self-en.
Speaker Change: and eight thanks for the morning Tom Chris. Morning, Peter.
Peter Armand: Hey, maybe just highlight the, you talked about 700 million plus and new takeaways.
Peter Armand: Full Spectrum Cyber, it's super impressive, obviously you guys are really doing well in so many fronts but maybe you could just talk about more color there and where we expect to see this kind of flow through the new take-away thanks again.
Speaker Change: Well thank you Peter and yes we're very excited about the...
Speaker Change: the National Security Individual.
Speaker Change: Segment.
Speaker Change: You know, as I think about that segment and light-os, it really is the core of the core of what light-os has always been and has always done extremely well. And we've got a fantastic history in that segment of winning.
Speaker Change: Big franchise programs, multi-billion dollar franchise programs. And so we like that business. We've put a leadership team in that business that we trust.
Speaker Change: and you're already starting to see in this third quarter the beginning of us getting our...
Speaker Change: Fitzfaw back.
Speaker Change: in our winning ways in that business. So, very excited about that and we look forward to more conversations about.
Speaker Change: Cyber Wins going forward. At the same time...
Speaker Change: You know, cyber has been one of the golden bolts that we've been investing in has a core competency of light-os.
Speaker Change: for our whole history. And so not only are we very proud of the team that's leveraging our cyber chops for cyber wins, especially for our very, very important to the intelligent community customer.
Speaker Change: But we're also very proud of the fact that our cyber capabilities and our zero trust.
Speaker Change: Robotos is frequently commented on by customers as a reason we win in other markets also.
Speaker Change: We're very proud of the return on investment we're getting in our cybersecurity business and as an underlying capability of everything light of does.
Speaker Change: Obviously, these are customers where we can't really say too much more than we already have about where we win and what those programs are. But we're very excited about it and we're very, very committed.
Speaker Change: to expanding our capability to help our government be the smartest government on the face of the earth.
Speaker Change: Yeah Peter, I think A gun was certainly something that fits into that arena but Tom talks about a lot of classified work there that we can't get too much color on but
Speaker Change: Clearly the team has been focused on differentiation and the investments that we've been making and will continue to make really positions as well to grow that area that business more robustly as we had in 25 and beyond.
Speaker Change: Thanks for this. Thanks, Thomas. I'm Peter. Thank you.
Speaker Change: Thank you.
Speaker Change: and our next question coming from the line up. Gila Kodakula would Jeffrey, she'll let us open.
Speaker Change: Good morning, Thomas. Chris and thank you. Thanks for the script as well, Thomas. It's super helpful, honing in on one segment. So I'm going to ask about help at the level, of course. So maybe we could talk about...
Speaker Change: [inaudible] I'm going to be a part of the second time I've been in the past.
Speaker Change: Thanks Sheila and great to be with you again this morning. Yeah, so as I tried to highlight in my prepared remarks, we've had a fantastic third quarter in our health and civil business and before I get into managed health services, I want to again.
Speaker Change: Broadly overview the fact that that business is much more than just that.
Speaker Change: We serve a variety of customers.
Speaker Change: and I'm going to say that everything from NASA and making sure that the logistics to the space station.
Speaker Change: R. Maintain.
Speaker Change: We do...
Speaker Change: Critical Work, yeah.
Speaker Change: for our customers at the...
Speaker Change: National Institute of Health and the National Science Foundation. We do exams for the FBI, the Secret Service and the Department of Labor. So it really is a broad segment of our business and it's a business that is outperforming in all of those facets.
Speaker Change: On the VA and on the VA since I appreciate the fact that that's your question.
Speaker Change: and we had a great quarter that helped us clear the air. The fog of war has been lifted and now we see our way through for not only the next year or two but much longer into the future.
Speaker Change: As I mentioned, the customer has currently extended the current contract we have them with the option year that they had.
Speaker Change: We expect them to formally contract for the next two years, along essentially the same terms as the business we have today.
Speaker Change: We're very confident in the fact that we'll be able to maintain our volume, our throughput, and our profitability of that business.
Speaker Change: Over that contract, and as I suggested in my prepared remarks, Sheila, we also are very excited about what the BBA is setting up for the terms of the next competition.
Speaker Change: It incents innovation, it incents technology, and when you talk about critical customer missions with deep technology needs, you're talking Leidos. So we're very excited about that business.
Speaker Change: We're currently continuing to invest in it. We're making sure we don't wait for the RFP to innovate and bring even more efficient and effective solutions forward for our customers. And so we're very bullish on the long term.
Speaker Change: Business were in for health and civil.
Speaker Change: and in fact
Speaker Change: Spoiler alert. When you come to March, you'll see that growing this business is a core of our growth strategy going forward. So far from us seeing it as a business that is sunsetting or at its apex, we see it as only a business that's just begun to be a growth engine for lighters.
Speaker Change: Chris, you have anything you'd like to add? A couple additional points you have.
Chris Cage: Clearly again our third quarter performance part of that was the incentive.
Chris Cage: Related to doing great work.
Chris Cage: with High-Customer Satisfaction, with differentiation. Those are the things that will compel us to be a prominent provider in this space for.
Chris Cage: the foreseeable future the other thing that you might have seen you know it's not done yet we don't counter our chickens but the customer in the military health side put out aadjustification authorization to extend our current work under the dim sum program for an additional three years that would
Chris Cage: should hopefully sort itself out middle of next year, but that's another strong indication of where customers really want to see the value that Leidos brings and they want to continue that relationship with us.
Chris Cage: Now as it relates to looking ahead to 2025, that's what we gave our our color commentary. This business has outperformed everybody's expectations for this year. Health and Civil has had a fantastic year.
Chris Cage: Our goal in the near term is to sustain that level of performance, and that's what gives us
Chris Cage: confidence in our ability to keep margins solidly in the 12% range for the corporation. Growing off of that base will be an area of focus certainly for the intermediate to longer-term horizon and we're very confident we'll be able to do that.
Speaker Change: Thanks again, Sheila.
Sheila: Thank you.
Speaker Change: And our next question coming from the line of Toby Sommer with True Security. The line is open.
Toby Sommer: Thank you. I wonder if you could give us an update on a small-ish program that we haven't talked about on these calls in a while.
Toby Sommer: sort of your capabilities
Toby Sommer: for
Toby Sommer: unclassified data collection.
Speaker Change: in the Buckeye program and others. I'm curious what the utilization of those company-owned assets is like and what the prospects for growth is like.
Speaker Change: Yeah, thanks Toby. Yeah, so Buckeye continues to be a very strong business within our defense segment.
Speaker Change: the assets we have deployed for that mission are
Speaker Change: I'll call it fully utilized, and we're sweating those assets very well. And in fact, expansions of those missions are part of what we're using
Speaker Change: Some of the capital we have in this fourth quarter for down payments for further growth in the coming years
Speaker Change: But in the here and now, these are critical capabilities that our warfighters
Speaker Change: rely on and we're proud to serve
Speaker Change: a very specific
Speaker Change: focused niche.
Speaker Change: of those customer capabilities that they need and want. So, Buckeye and other programs like it remain a part of Cindy's business.
Speaker Change: It's a part of the business we're very happy with.
Speaker Change: Yeah, and Toby, I'd just add, I mean, to Tom's point, we're seeing, even though there's been some programs that we haven't won, we actually are still a strong provider in the ecosystem of airborne ISR support to our customer missions.
Speaker Change: to Tom's point. We'll continue to see select opportunities to increase investment. Those are high return on investment types of plays when we make them, and so we'll look for those when they make sense.
Toby Sommer: Thank you, Toby.
Toby Sommer: Thank you.
Toby Sommer: Thank you.
Speaker Change: And our next question coming from the line of Mariana Perez Mora with Bank of America. Your line is open.
Speaker Change: Good morning everyone. Hey Mariana.
Speaker Change: So Chris, you said you're not ready to talk about FY25, but you mentioned the low single-digit growth. And as you mentioned, Dism, or MHS Genesis, is already expected to be extended. So that side is the risk. Then I see a lot of opportunities coming from ACOS.
Speaker Change: And at USA, everyone was really enthusiastic about the defense portfolio actually getting some traction. Missiles, ammunitions, counter-missile, hypersonics, all those things.
Speaker Change: What are the areas that are actually not growing or that you are conservative going into next year to actually think it's going to be this transition year in terms of growth?
Speaker Change: Well, thanks for the question, Mariana, and we do appreciate your enthusiasm. And you're right, there are a number of things across the portfolio that we're very excited about.
Speaker Change: But what we've also learned is some of those things take a longer gestation period to manifest themselves like we're seeing in the defense systems business today. Growth has been nice and on a good upward momentum, but it took some time to get there.
Speaker Change: As we look ahead to 25, you know, we do like our position. We feel really good about how the company's stacking up, but clearly health and civil off of this.
Speaker Change: substantially elevated level of performance is going to be in a more muted growth posture in the near term.
Speaker Change: accelerating away. We did talk about some of the wins in national security and digital. We see growth momentum accelerating there, but you know, you look at the backdrop, we're clearly in an election year. There is a risk, a potential, of there's an extended CR and some disruption. We've seen that play out in the past.
Speaker Change: So, as we see the landscape here today, we're going to be cautious about those things and if we get more clarity in the several months ahead, we'll be in a better position to refine that point of view going into the early part of next year.
Speaker Change: Mariana, I might add I really appreciate your enthusiasm for the business too and optimism. I share it. I think I think there is tremendous growth.
Speaker Change: available for Leidos and that will be the feature of our March 2025 Investors Day, focusing on those engines of growth we see within the portfolio that have been
Speaker Change: clearly identified as a result of our year of deep strategic thinking so we're very excited about it but I can't I can't not
Speaker Change: remind investors and analysts who attended our 2021 Investors Day that then we promised profitability of 10.5% in 2024.
Speaker Change: And the fact is, even with next year and the solid 12s, we're streets ahead of where this portfolio was envisioned to be just three years ago.
Speaker Change: We will not be resting on our laurels there.
Speaker Change: This is just an indication of the kind of pivot year that 2025 brings.
Speaker Change: But a pivot year is just that.
Speaker Change: It's a pivot year to greater growth and continued growth for a great portfolio of critical needs that our customers reward us for. So, that's the focus over the next coming months. We look forward to having that conversation with you in March and we're very bullish about the future of Leidos.
Speaker Change: Thank you and if I may, just a quick follow-up on the 29 billion that you have of like submitted bids in the pipeline, how much of those are new businesses versus recombids?
Speaker Change: Well, the, um...
Speaker Change: The 29 billion, I can't give you that, but I can tell you that when we look ahead to next year's portfolio, almost 70% of what is in the 2025 portfolio is new business and takeaway. So I don't have the exact point on the 29 billion, but a high percentage of that would also be new business and takeaway.
Speaker Change: Mariana. So we're, you know, the Recompete landscape is...
Speaker Change: is quite modest.
Speaker Change: you'll have clarity here on the next two years of that here soon if the military health system DMSIM program does play out the way we hope. We're really not talking about any substantial re-compete so that's a great position to be in for our BD team to really be attacking new work with vigor next year.
Speaker Change: Thank you for watching!
Speaker Change: Thank you, Maria.
Speaker Change: Thank you.
Speaker Change: And our next question, coming from the lineup, Kaivan Rumer with TDK, when the line is open.
Kaivan Rumer: Yes, thanks so much and terrific results and health. Thank you.
Speaker Change: The, you know, the recompete
Speaker Change: You know, the profitability is so good usually when you see markets
Speaker Change: with that kind of a profitability.
Kaivan Rumer: you tend to attract more entrants now. I know that...
Kaivan Rumer: The entry barriers are pretty high.
Kaivan Rumer: and that's been a plus, but, you know, you mentioned incentive improvements.
Speaker Change: Can you give us any color about, you know, the upcoming re-compete and do you expect that the profitability opportunity will be comparable or will there be more competitors or, you know, a different structure?
Speaker Change: So that they get a good result and you make good money, but not quite as much as you're making today. Thank you
Speaker Change: Thank you, Kai. I appreciate the sense of your question, but of course there's some questions I really can't answer in there.
Speaker Change: And, at the same time, I can say that we're very confident in the continued profitability of this business over the next couple of years, and we look forward to the re-compete because, as I suggested, it incents the very things that we're excellent at.
Speaker Change: So, um...
Speaker Change: There is for us
Speaker Change: confidence that we'll be able to lean into the business to help the VA get what they want, which is
Speaker Change: customer satisfaction and volume.
Speaker Change: At the same time, we feel very good about how we've been able to weave into our solutions in this space.
Speaker Change: Trusted Mission AI, and other innovative processes that allowed us to bring down our costs.
Speaker Change: and sweat the fixed assets that we have and so as a result the profitability of this business and the opportunity for us to expand it
Speaker Change: are core parts of our strategy for growth for Lido. So we don't see it as a net negative, but rather an area where we're going to be able to hold on to the profitability and expand the top line. Chris. I just, you know, would remind you, I mean, the.
Speaker Change: We did get the option your exercise.
Speaker Change: So we have clarity on, you know, the contract we're performing under right now, but to recompete to Tom's point, we can't give a lot of detail there.
Speaker Change: But again, our team...
Speaker Change: really focused on how do we maintain a competitive position and work with our customer, but at the same time, you know, get a return on the investments we've made.
Speaker Change: It's not just the work going on in the VA. Tom spotlighted, you know, there's much more going on in managed health services with other customers that we're doing work for. So the expansion of that entire portfolio enables us to, you know, have visibility and confidence in the ability to retain a high level of margin performance.
Speaker Change: Thank you.
Speaker Change: Terrific. Thank you. And if I may, one more. Dynetics, you know, for years it's basically had lots of opportunity, lots of potential, and has had trouble really fully converting that. When you talk of low single-digit growth next year and then better growth as we move farther out, is Dynetics in that bucket?
Speaker Change: Dianetics is definitely in that bucket. I mean, you know, again, Tom featured, think about the BD results they had this quarter is eye-watering, excellent book to bill.
Speaker Change: a couple years to get into a full rate production type mode. And those are the kinds of things that give us confidence on the uplift. We still don't have full clarity on how quickly the customer will ramp up our hypersonics work. We're ready to scale. We're dependent upon industry partners. So there are some things there that definitely
Speaker Change: are exciting for the future, and we expect that growth momentum to...
Speaker Change: continue, but the best years for that business still are ahead of it. In fact Kai, I'll just add on. Chris talks about an excellent book to bill. Just to put a little context on it, that's greater than a three times book to bill just for our defense segment.
Speaker Change: So that's the kind of quarter they had. And what we're starting to see, Cindy and the leadership team there are starting to really focus from that kaleidoscope of opportunities and the potential that's always been there.
Speaker Change: to focus on the things that are really important to our DoD customers now to fight for the future.
Speaker Change: You know, one of the things we talked about was
Speaker Change: the SOCOM customer restarting.
Speaker Change: a production line for small glide munitions. That's huge because that line had gone dormant and the customer has come back to light us and said, we need more of that product.
Speaker Change: That has spawned the ability for us now to prototype and start to test this small cruise missile, Black Arrow, that I referenced.
Speaker Change: That's a direct result of not only our prowess on small glide munitions, but also remember the Gremlin program.
Speaker Change: and affordable capability for standoff weapons. So we're very bullish, as Chris says, about the future of Dynetics and the ability for the current management team to take all of that potential and make diamonds out of it.
Speaker Change: Thanks for watching!
Speaker Change: Thanks, Scott.
Scott: Thank you.
Speaker Change: And our next question, coming from the lineup, Scott Mankus with Mellius Research. Your line is open.
Speaker Change: Morning. Morning, Scott.
Scott Mankus: Tom, Chris, a little over a year ago you guys won CHS-6. I was wondering if you could talk about how that's ramped so far and are the margins for that program accretive to the overall business or are they still dilutive as you're making the investments to ramp up?
Speaker Change: Yeah, Scott, I'd say, you know, the team has done a great job of getting that program
Speaker Change: ramped up in the year one. As you can imagine, both programs in the early phases aren't reaching their full potential and the same is true on CHS 6.
Speaker Change: We saw an early flurry of buying activity for longer lead things that will help
Speaker Change: increased revenue volume in 2025 and beyond.
Speaker Change: So, you know, I would say the margins aren't where we expect them to be for the long haul as of yet, but, and despite that, you know, look at the great performance we're seeing in national security and digital so that the team's in a good spot there and CHS-6.
Speaker Change: will be a nice contributor to the portfolio over time, but it certainly hasn't reached its full potential.
Speaker Change: Scott, just to pile on a little bit, one of the things we've been doing as we retool our business development approach is
Speaker Change: We've also been ensuring we have the experts who can
Speaker Change: Communicate to customers the art of the possible.
Speaker Change: One of the things we've discovered is that
Speaker Change: the tool that CHS-6 is.
Speaker Change: is not universally understood within the Army, and we have people out there right now ensuring that our customer understands.
Speaker Change: their ability to use CHS6 to buy a wide variety of products and capabilities.
Speaker Change: We feel very good about that, and we're incentivizing our program managers to fill out the full potential of the IDIQ contracts that we have. So we feel very good about the fact that maybe we're a little slow out of the blocks on that program and it hasn't hit its...
Speaker Change: its stride yet, but I'm convinced that the Army, we, and our business development team are going to be able to help us supercharge that program for part of our success going forward.
Speaker Change: Thanks, Scott.
Scott Mankus: Thank you.
Speaker Change: Thank you. And our next question coming from the line of Noah Popenek with Goldman Sachs. Your line is open.
Speaker Change: Hey, good morning, everybody. Good morning, Noah.
Noah Popenek: I just want to make sure I have the timeline on.
Noah Popenek: the VBA work inside of Health and Civil, correct?
Noah Popenek: Because Chris, I thought you referenced the one-year extension from the VA, but then I heard you, I thought, in the Q&A, referencing...
Noah Popenek: multiple years. So I guess, how much visibility do you have now on what funding mechanisms? And then whenever there is a recompete, when exactly are you now expecting the recompete and how much actual revenue is being recompeted?
Noah Popenek: And then on the margins, am I hearing you correctly that you believe north of 20% adjusted segment operating margin is a reasonable medium to long-term framework for this business?
Speaker Change: No, let me go first and I'll give you some some big big tectonic plates and then Chris will fill in.
Speaker Change: the details. First, as we said, we're currently on an option year to the current contract, so that's ongoing.
Speaker Change: Second, we expect a two-year award to be made in the coming weeks, so let's call that November, sometime in November. The terms of that contract will be largely similar to what we have now.
Speaker Change: and then after that two-year contract the customer assumes they'll be awarding new multi-year contracts for the way forward at that point.
Speaker Change: So, we're currently on an option year. As soon as the new award gets placed, that option year will cede and we'll be on the terms of the new two-year contract, and then there'll be a multi-year contract beyond that.
Speaker Change: Right, so no that kind of gives you the laydown of the activity set. It's not the entirety of the work we do for the VA, it's four of the regions. There's other contracts as well, so
Speaker Change: But it's a substantial piece of business that, again, we've put forward a compelling bid for, we believe.
Speaker Change: Going forward as it relates to margins. Yes, I think you're in the right zip code here, right? As far as 20-ish plus percent for this segment going forward. We outperformed that over the last two quarters. You've seen numbers in the 24 percent range. I feel like, you know, that is
Speaker Change: excellent, excellent results by the team. So you know north of 20 is certainly something that we see increased clarity on now and feel much more bullish about sustaining that performance going forward.
Speaker Change: and we're going to achieve that not only by doing more of what we do now but expanding the suite of services that we provide.
Speaker Change: More in March.
Speaker Change: Great, I appreciate the additional color there. Thank you very much.
Speaker Change: Thank you. Our next question coming from the line up, Seth Seifman with JPMorgan. Your line is open.
Speaker Change: Hi, good morning. This is Rocco on for Seth. Hi Rocco.
Rocco: Are there any notable factors that have been weighing on national security and digital growth, and what does the pathway look like to accelerate the growth in this segment moving forward?
Speaker Change: Well, you know, so National Security Digital, we featured in our in our call, there's been some shifting of budgets and priorities and some of our intelligence community customers.
Speaker Change: you know, not tectonic shifts, but smaller shifts focused more towards great power competition.
Speaker Change: some, you know, inability to get the cleared personnel in the right spot that is always an inhibitor. Our team has managed around that very successfully and I think has positioned that business for increased growth going forward. A lot of the key wins that we featured in the call will show up as catalysts.
Speaker Change: ultimately once they clear that process, so we're looking forward to a positive resolution there. But you know the team has been shifting the portfolio, pivoting a bit, and we're seeing early returns on the digital side, the digital modernization part of that portfolio, and expect even greater results there going forward.
Speaker Change: Rocco, I mentioned to an earlier question that
Speaker Change: We see our place in the universe as helping our government be the smartest government on the face of the earth.
Speaker Change: I would suggest that one challenge our customers have
Speaker Change: in helping us help them fulfill that mission is relatively stable budgets or, when you price in inflation, flat to declining budgets.
Speaker Change: and so I know no taxpayer wants to hear that but our national security and intelligence community work really is challenged with limited top-line growth against a threat environment that is
Speaker Change: incredibly diverse and not feeding. So I would love to see a little bit more top-line growth and I know our customers would love to be able to do more things so as to help our government be the most brilliant government on the face of the earth.
Speaker Change: Thanks, Rocco.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question coming from the lineup, Ken Herbert with RBC Capital Markets. The line is open.
Speaker Change: Good morning, Tom and Chris. Really nice results. Thank you, Ken.
Ken Herbert: Hey, maybe Chris, the updated guide for 24 implies sort of a step down in top line in the fourth quarter, sort of that 3% range.
Ken Herbert: with what sounds like really nice results, again, expected out of Health and Civil. How do we think about maybe the moving pieces within the segments of the fourth quarter, if you can give any granularity there? And I guess as part of that,
Ken Herbert: Is it fair to sort of look at maybe the the top line parameters and and the operating or adjusted EBITDA in the fourth quarter as maybe a good indicator of of starting point or how 25 could look based upon some of your higher level comments earlier?
Speaker Change: Thanks, Ken. We've had a fantastic year and that fantastic year has positioned us to be even more intentional around some investments that we're making in the fourth quarter to position ourselves for long-term, both on
Speaker Change: innovation and technology, but also on our employees and employee engagement. So you'll see some of those things manifest themselves in Q4. Q4 obviously does have a higher level of
Speaker Change: you know, time off, right? Vacation time that we're we're baking in and just allowing for the potential risk around any disruptions in funding and those types of things following on from election. We hope we don't see any of those, but there's always that potential.
Speaker Change: I can I would look more to our comments for next year as it relates to margins you know solidly in the 12% so a modest step down in Q4 is not indicative of how we see the business running into next year we see you know strong performance
Speaker Change: out of the gates there. And so you should expect that. But revenue volumes, there's some puts and takes. There's probably, you know, flattish performance from Q3 into Q4 as we look at the disability exam work.
Speaker Change: Timing of some materials that could ebb and flow, but as I mentioned, you know, just cautionary note on what happens with the budget environment and vacation and leave for our employees because it's been well-deserved.
Speaker Change: Thank you. Our next question coming from
Speaker Change: Tom, Chris, and Stuart, good morning. Good morning, Louie.
Speaker Change: You discussed how the PACT Act is stimulating exam volumes. Based on your crystal ball, was the exam volume level in 2Q and 3Q, was that the peak in terms of exam volumes or should that continue to trend higher in the fourth quarter?
Speaker Change: 2025.
Speaker Change: We're here.
Speaker Change: Go ahead, Chris. I'm sorry, Louis. I mean, as I just was saying to Ken, I don't see Q4 showing an uptick over what we've seen, you know, Q2 and Q3 spectacular performance.
Speaker Change: a couple years ago. So in that zone is probably the expectation that we see over the next several quarters and beyond, but not at an elevated level. Yeah, I agree.
Speaker Change: So it's-
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of David Strauss with Barclays, your line is open.
Speaker Change: Hi, good morning. This is Josh Korn on for David. I just wanted to ask, so now that you've done just about the full 500 million of share repurchases that you had been talking about, I just wanted to ask about repurchases and capital deployment priorities in Q4 and going forward. Thanks.
Speaker Change: Yeah, thanks for that. Yes, obviously, we will certainly complete the 50 million outstanding and we'll be evaluating uses of capital against alternate internal uses at the same time. But as I trailed in my formal comments,
Speaker Change: We'll continue for this year to be customer friendly, excuse me, investor friendly, and I think you should look at the increase in our dividend as a down payment on how we view that.
Speaker Change: Yeah, I mean, we're in a great position, Josh, as you realize, you know, with the strong cash position coming out of Q3. We still see value in the stock clearly and with our best days ahead of us, you know, we'll continue to be comfortable moving into the market when it makes sense.
Speaker Change: Thanks for watching!
Speaker Change: I appreciate the question. We have time for just one more.
Speaker Change: This is our last questioner coming from the line of Matt Akers with Wells Fargo. Your line is open.
Matt Akers: Yeah, good morning guys. Thanks for the question. I wanted to comment, I guess health margins helped, you know, obviously up a lot this quarter, but the other three margins, other three segments have had, you know, pretty good uptake and profitability kind of a little less.
Speaker Change: Yes, I wonder if you could just talk about sort of what's driving that and kind of how much further there is to push margins higher in some of those other segments.
Speaker Change: Yeah, thanks, Matt, for that question. We appreciate you recognizing that, you know, we're getting this done not just solely through the health and civil business, but our other leaders of
Speaker Change: through these franchise programs that we're already operating on. So we've seen some early returns there, and we think there's more opportunities for, you know, how we do cloud migrations, you know, help desk support, you name it, across our portfolio of contracts.
Speaker Change: In defense systems, again, just program execution discipline, better bidding discipline. The team has got a lot more rigor on their programs as they advance to, you know, beyond the initial
Speaker Change: prototype phases of some of those programs and that's showing up and as I trailed in my prepared remarks the EAC performance the best in four years so that gets to our program managers across the business
Speaker Change: Great work by them, great work on the program execution side and and and so again, we're not done I think there's more gas in the tank in the portfolio
Speaker Change: And all I'll add, Matt, is that while all our segments reflect different market realities of the potential profitability, all of our segment leaders are incentivized to be best in class profitability. So stand by for more.
Speaker Change: I appreciate the question, Matt, and I just want to thank the operator for your assistance on today's call and thank everybody that joined us here for your time this morning and your interest in lidus. We look forward to updating you again soon. Have a great day.
Speaker Change: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and you may now disconnect.