Q4 2024 Leidos Holdings Inc Earnings Call
Greetings. Welcome to Lido's 4th Quarter Fiscal Year 2024 Earnings Call.
At this time, Orbiter spins on a listen-only mode.
A brief question and answer session will follow the formal presentation.
Speaker Change: Please note this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis from Vestalations. Stuart, you may begin.
Thank you, Operator, and good morning, everyone.
Speaker Change: I'd like to welcome you to our fourth quarter and fiscal year 2024 earnings conference call.
Speaker Change: Joining me today are Tom Bell, our CEO, and Chris Cage, our CFO.
Speaker Change: where you'll also find the earnings release and supplemental financial presentation slides that we're using today.
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, does include 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 3, 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, let me turn the call over to Tom Bell, who will begin on slide 4.
Tom Bell: Thank you, Stuart, and good morning everyone. I'm happy you could join us to discuss another outstanding quarter for LITOS.
Tom Bell: Tapping off a very strong year delivering 2024 results above the high end of our prior guidance.
Tom Bell: Leidos' excellent recent performance also allowed us to reach and exceed the three-year performance targets we set out at our Investor Day in 2021.
Tom Bell: I'm very pleased we were able to over deliver on those cumulative commitments.
Tom Bell: Against the targets set then, we delivered an organic revenue growth CAGR of 6.6%, well above our goal.
We delivered adjusted EBITDA margin for 2024 of 12.9%.
240 basis points above our goal.
Tom Bell: and we drove free cash flow conversion of 100% exactly on our commitment.
Tom Bell: This delivered cumulative operating cash flow to our target of 3.5 billion dollars.
Tom Bell: Our excellent multi-year performance enabled us to take our gross debt leverage ratio down from 3.4 times to 2.2 times today.
Tom Bell: And now, our strong balance sheet and core financial engine give us the financial flexibility to deploy capital to support tangible growth initiatives and drive brilliant shareholder value.
Tom Bell: All on this call will be aware that since 12 November, our stock has traded down about 25%.
Tom Bell: As a result, we repurchased an additional $400 million worth of shares in the fourth quarter.
Tom Bell: That brought our open market repurchases for 2024 to $850 million, significantly exceeding our initial commitment.
Tom Bell: As always, I want to thank each of our 48,000 Leidosians who bring our bold vision for Leidos to life every day.
Tom Bell: Their passion for our customers' mission, their fortitude, resilience, and ingenuity enable us to deliver exceptional value to our shareholders, even in the most dynamic of environments.
Tom Bell: Turning to slide 5, in addition to delivering exceptional performance last year, 2024 was a year of deep strategic thinking.
We're calling our new growth strategy North Star 2030.
Tom Bell: North Star 2030 keys on a specific group of growth pillars where we know customer needs are growing, market profitability is robust, and LIDO's differentiation is evident and accelerating.
Tom Bell: We'll fully unpack our Northstar 2030 strategy for you at our upcoming Investors Day.
Tom Bell: But undertaking this strategy effort last year is proving to have been timed perfectly.
Tom Bell: I mention all this now because a natural question today might be, how does North Star 2030 hold up to the priorities of this new administration? And the answer is incredibly well.
Tom Bell: You'll recall that our strategy process last year was grounded in a 10-year future-back Leidos proprietary hypothesis of the future.
Tom Bell: That work detailed macro-domestic and geopolitical megatrends that we predicted would occur over the next decade.
Tom Bell: Now, we see those megatrends coming through at pace, and therefore, we are even more confident our growth pillars position us for success today and in the future, because they are all grounded in one unifying theme.
Leidos exists.
to make our customers' outcomes smarter and more efficient.
Tom Bell: Everything we do for every one of our customers is linked to that statement.
We were created to leverage innovation for our customers.
Tom Bell: to meet the immense and enduring national security challenges faced by America and its allies.
From protecting the homeland to deterring and winning battles abroad.
And driving government efficiency is fundamental to everything we do.
And, of course,
That's what's needed to expand America's economic strength.
All that is what we're all about.
Tom Bell: And that's exactly what our new administration is all about too.
Tom Bell: Therefore, we view the new administration's priorities as an opportunity for LITOS.
Tom Bell: Over the past months, the administration and the Department of Government Efficiency have begun to unveil an agenda to transform government operations and ensure taxpayer dollars are invested more wisely.
Tom Bell: The new administration has signaled a focus on eliminating regulations, streamlining procurement, and moving to more outcome-based contracting, all of which are exactly in line with the mission and work of Leidos to make government smarter and more efficient.
Three current focus areas are right in our wheelhouse.
IT modernization, transformational warfighting capability, and increased privatization.
Tom Bell: First, the new administration has said that IT modernization is low-hanging fruit for government efficiency.
We totally agree.
Tom Bell: The federal government's ability to reduce costs, bridge outdated and desperate data silos, and facilitate the adoption of enabling technologies, like trusted mission AI, hinges on having modern, adaptable IT systems.
Speaker Change: As the leading provider of IT software solutions for the federal government, we have a proven track record of modernizing and simplifying our customers complex IT environments, while integrated trusted mission AI and robust cyber security.
Tom Bell: This allows agencies to achieve their mission objectives smarter, faster, and cheaper.
Tom Bell: For example, the disability case processing system we built for the Social Security Administration has improved processing time of disability claims by over 90%, reducing backlog by over 50%
Tom Bell: Leidos is delivering significant cost savings to the SSA through these customer efficiency enhancements and proven anti-fraud tools.
Tom Bell: In addition, just last year we also transformed the SSA's National 1-800 number.
Tom Bell: The administration's focus on IT modernization also affords us a great refreshed opportunity to accelerate adoption of our existing Defense Enclave Services Program.
Tom Bell: To date, we've successfully transitioned only three Defense Agency and Field Activities, or DAFAs, and their 32,000 users, each on time and on budget.
As a result,
Tom Bell: Those DoD offices now enjoy better user experiences and better service delivery. But even more importantly, they are now operating seamlessly within a single, robust, cyber-secure, efficient, integrated DoD IT system.
Tom Bell: But there are 11 DAFAs and nearly 330,000 additional users originally envisioned to be served by this program that are yet to be migrated.
Tom Bell: We look forward to helping our new Secretary of Defense greatly enhance user efficiency, harden IT assets, and reduce costs by completing the remaining migrations to DISA's standardized, unified, and secured IT network.
Tom Bell: In turn, this will enable DoD reinvestment of real savings into critical warfighting capabilities.
Tom Bell: So speaking of critical warfighting capabilities, secondly, administration leadership has indicated that the Pentagon's top-line budget should focus on the right kind of programs with increased investments in cost-effective and high-performance systems.
Tom Bell: In anticipation of these demands, we have positioned ourselves as a positive disruptor.
Tom Bell: Rapidly transforming innovative ideas into market-ready solutions essential for next-generation warfighting capabilities.
Tom Bell: For example, we lead the way in maritime autonomy. We recently developed an unmanned undersea multi-mission vessel in less than 18 months.
Tom Bell: with a price that is, to the best of our knowledge, significantly lower than all comparable offerings.
Tom Bell: This success has enabled the Navy to expand our program's size and scope, allowing us to enhance underwater ISR capabilities and develop multi-sensor UUVs and other unmanned platforms.
Tom Bell: We also designed and deployed a small unmanned surface vehicle called Archer.
Tom Bell: Archer is equipped with a modular mission bay designed for anything contested logistics, ISR, or weaponry. We did all that in less than nine months.
Tom Bell: Archer provides the U.S. and our allies with immediate access to flexible, advanced maritime designs with proven, long-endurance, robust, autonomous capabilities.
Tom Bell: Additionally, we're developing a new class of small cruise missiles advancing from concept to successful demonstration flights in under two years.
Tom Bell: And we're achieving dramatic cost savings for this critical capability through a modular design featuring open architecture that incorporates the best, most affordable subsystems and technologies using digital twin philosophies and AI optimization.
Tom Bell: These groundbreaking developments highlight our defense system team's focus on delivering affordable mass warfighting capabilities with unmatched speed, efficiency, and efficacy.
Tom Bell: which the DoD needs today to prevail across increasingly complex and contested domains.
Tom Bell: Third, leaders are calling for expanded public-private partnerships for essential citizen services to create more efficient and effective outcomes.
We have deep expertise and success here too.
Tom Bell: For instance, for decades, we've partnered with the Veterans Administration to transform the delivery of health care to our nation's deserving veterans.
Tom Bell: With our proprietary capabilities to anticipate demand and our ability to innovate at scale, we have established the largest, most flexible network of first-class medical and mobile clinics.
Tom Bell: This has allowed us to increase veteran throughput by more than 300 percent and halve the average exam timeline.
Tom Bell: And we've delivered all this efficiency while consistently exceeding VA targets for both timeliness and, critically, quality of care.
Tom Bell: As part of this, we're very proud to deliver excellent care coordination for homebound veterans and those in remote locations.
Tom Bell: bringing first-class care to where the veteran is across all 50 states.
Tom Bell: These capabilities magnify Lidos' differentiation and recognition as a top managed health services provider for our federal customers.
Tom Bell: But our VA work is just one of many examples of successful privatization.
Tom Bell: Another case study of our success in public-private partnerships is the Future Flight Services Program for the FAA.
Tom Bell: Through this program, we provide critical services to general aviation pilots.
Tom Bell: By providing this service, we've saved the Federal Aviation Administration more than $2 billion.
Tom Bell: by significantly modernizing underlying technology, all while maintaining at or above 99.9% system availability.
Tom Bell: 2025 will be an exciting year as we implement our new North Star 2030 strategy, and we're already seeing great traction in our robust growth ambitions.
Tom Bell: In the fourth quarter of 2024, we had net bookings of $7.6 billion, delivering a book-to-bill ratio of 1.7, our highest ever for a December quarter.
Tom Bell: And 2024 overall was our best growth year since 2020 with an overall book ratio of 1.4 and a year-over-year backlog growth of 18 percent.
Tom Bell: I'm very proud of the quality of our backlog achieved through many significant wins, all aligned to durable markets and critical customer missions which in turn enjoy bipartisan political support.
Tom Bell: Let me walk through a few key awards in the quarter.
Tom Bell: First, the VA has awarded us a two-year, multi-billion dollar award for medical disability examinations.
Tom Bell: This award underscores our ongoing ability to deliver excellence for the VA and our nation's veterans.
Tom Bell: And it aligns with the financial expectations we outlined to you on our last earnings call.
Tom Bell: Second, we want a 2.6 billion dollar follow-on for our integrated logistics software work for the Transportation Security Administration.
Tom Bell: This 8-year award comes with significant increases to our contract's size and scope, and continues to position us very well with the new administration's determined focus on homeland security.
Tom Bell: Third, we received a 4.1 billion dollar sole source IDIQ for our IFPIC Enduring Shield air defense system.
Tom Bell: So far, we've only booked one task order under this IDIQ to provide systems for the defense of Guam.
Tom Bell: But this IDIQ provides us and our customer all the top line room they need to ramp up production of this critical capability for years to come.
Tom Bell: And fourth, we secured a 670 million dollar task order to advance our nation's long-range hypersonic weapon, specifically our development and production of the common hypersonic glide body and its thermal protection system.
So in summary, 2024 was a great year for Leidos.
Tom Bell: But all that success is just prologue for our exciting future.
Tom Bell: Enabling disruptive progress is core to our work of making all our customers outcomes smarter and more efficient.
Tom Bell: Pure American entrepreneurial spirit was forged at our founding and is alive and growing here today at Leidos.
Tom Bell: Our passion is to look at problems differently and seek innovative solutions and outstanding customer results.
Tom Bell: And this drive and culture serve us incredibly well in today's environment.
Tom Bell: Our new administration is moving quickly with its efficiency of agenda.
Tom Bell: and Leidos is positioned to be a major contributor to the success of that agenda.
Tom Bell: Building on the bold vision of our North Star 2030 strategy, and in light of the new administration's priorities and the core competencies I've outlined,
Tom Bell: We've developed a set of fast-paced initiatives in the spirit of Doge to make our customers' outcomes smarter and more efficient.
Tom Bell: And over the next 90 days, we will continue executing a purposeful campaign we've already begun to work with our customers, administration officials, and elected representatives on these initiatives for a smarter, more efficient U.S. government now.
Tom Bell: Now is the time for us to act with pace in this new landscape.
Tom Bell: We are exceptionally well-placed to be a critical part of the solution.
And so, seizing this opportunity remains our top corporate priority.
Tom Bell: As a result, we look forward to holding our Investor Day this summer.
Tom Bell: I'm super excited about our proven track record of performance in dynamic environments.
Tom Bell: our strong foundation for executing a successful 2025 and beyond, our bold vision for LITOS and our North Star 2030 strategy, and our outstanding outlook.
Tom Bell: With that, I'm going to pass the call over to Chris to walk through our 2024 results and give you our enhanced financial outlook for 2025.
Bruce
Thanks, Tom, and good morning, everyone.
Tom Bell: I'd like to echo Tom's remarks on the remarkable journey we've been on. This team has rallied to over-deliver at every turn, this quarter, this year, and over the past three years.
Tom Bell: These accomplishments are rooted in a meaningful cultural transformation in how we manage and operate our business, which enabled us to deliver outstanding results while building a path to a better future.
Tom Bell: We delivered industry-leading margins and we invested to strengthen internal functions, enhance technical capabilities, double down on business development, and reward our employees.
Tom Bell: Now, let me walk you through our financial performance for the fourth quarter and full year. Please turn to slide 6.
Tom Bell: Revenue for the quarter was nearly $4.37 billion, for a robust organic growth rate of 9.7%.
Tom Bell: Although the quarter did include an extra week as part of the normal, periodic true-up over our 4-4-5 financial calendar.
Tom Bell: For the year, total revenue grew 7.9% to $16.66 billion, or $212 million above the high end of our prior guidance range.
Adjusted EBITDA was 508 million for the...
Tom Bell: for the fourth quarter, an adjusted EBITDA margin of 11.6% was up 20 basis points year over year.
Tom Bell: The fourth quarter margin includes the cost of enhancing some of our employee benefits in light of our strong performance, which ripple through the segment margins as well.
Tom Bell: On a full-year basis, Adjusted EBITDA was $2.15 billion. An Adjusted EBITDA margin increased 210 basis points to 12.9%, putting us right at the upper end of the High 12s guide from last call.
Tom Bell: Our margins have benefited from a fundamental shift in our portfolio.
Speaker Change: Currently, 43% of our portfolio is fixed price, up from 39% in 2023. As Tom touched on, we view the move to more outcome-based procurement as a continued area of opportunity for LIDARs.
Speaker Change: Non-GAAP net income was $316 million for the quarter and $1.4 billion for the year, which generated non-GAAP diluted EPS of $2.37 and $10.21, respectively.
Speaker Change: For the year, non-GAAP diluted EPS was up an impressive 40 percent, almost $3.00 above 2023, and 21 cents above the high end of our prior guidance range.
Speaker Change: The primary driver of the robust EPS growth in 2024, the best in our history, was consistently strong EVADOT generation.
more than offset a slightly higher tax rate.
Speaker Change: Turning now to an overview of our segment results and key drivers. In the interest of time, I'll focus on the quarterly figures on slide 7. The full year comparisons are shown on slide 8.
Speaker Change: National security and digital revenue growth accelerated to 5.5% spurred by strong business development results in the last two quarters.
Speaker Change: Segment operating income margins slipped a bit to 9.7% with normal variations in profitability across multiple fixed price programs.
Speaker Change: Still, margin of 10.2% for the year was above initial expectations, and we look for profitability to continue to increase through repeatable offerings and higher margin growth pillars.
Speaker Change: Health and civil revenues and profitability remained strong. Revenues were up 16.4 percent from the prior quarter and non-GAAP operating margin was 21.6 percent.
Speaker Change: These results were driven by high demand in our managed health services, as well as excellent program execution across the portfolio.
Speaker Change: With the VBA MDE Recompete in hand, we remain confident in our ability to win our fair share by continuing to bring innovative solutions to the VA to more efficiently serve our veterans.
Speaker Change: Commercial and international revenues increased 12.3% year-over-year with growth across all business areas.
Speaker Change: Non-GAAP operating margin for the quarter was 7.9 percent, down 80 basis points from the prior year quarter due to a product mix within SES and increased investments in growth.
Speaker Change: Building off this strong top-line finish and sunsetting the challenges faced this year in the UK, we fully expect margins to improve and stabilize going forward.
Speaker Change: Lastly, defense systems revenues increased 6.7%, spurred by this year's wins like Diablo and Wide Field of the Entrenched II, as well as additional production on our IFTIC Enduring Shield Program.
Speaker Change: Segment non-gap operating margin was 3.5% which included a 21 million dollar write-off associated with an airborne surveillance asset.
and investments in our proliferated low-Earth-orbit space architecture.
Speaker Change: Though a short-term pause on the margin momentum built in the second and third quarters, we believe this provides a cleaner and more focused foundation as we enter 2025.
Speaker Change: Turning now to cash flow and the balance sheet on slide 9.
Speaker Change: Operating cash flow for the quarter was $299 million. DSO for the quarter was 59 days, in line with the third quarter of 2024.
Speaker Change: For the year, operating cash flow was $1.39 billion, $42 million above our prior guidance.
Speaker Change: Netting out capital expenditures, free cash flow was $213 million in the quarter and $1.24 billion for the year, which was up 30% compared to 2023.
Speaker Change: In the fourth quarter, we repurchased $406 million worth of shares and paid $53 million in dividends.
Tom Bell: As Tom mentioned, we significantly exceeded our $500 million annual share repurchase commitment.
keeping our promise to deploy capital in a shareholder-friendly manner.
Tom Bell: As of quarter end, we had $943 million in cash and cash equivalent, $4.7 billion in debt, and a leverage ratio of 2.2 times gross debt to adjusted EBITDA.
Tom Bell: Our healthy balance sheet and financial performance led S&P to enhance our investment grade rating to BBB flat and Moody's to change their outlook to positive with the potential to upgrade to BAA1 within the next 12 months.
Tom Bell: These moves strengthen our position as we prepare for the maturation of a $500 million bond this May. We are still weighing our options, but given our below-target leverage, our current intention is to refinance this debt.
Now on to the Forward Outlook on slide 10.
Tom Bell: Coming off a record-breaking 2024, we're even more confident in our market positioning and pathways for profitable growth.
Tom Bell: Recent wins create a strong growth footing and our pipeline is robust. We submitted 8.3 billion of proposals in the quarter and have 25.6 billion of bids awaiting adjudication.
Tom Bell: With broad-based momentum building, we are confident in our ability to navigate any macro uncertainties from a position of strength.
Tom Bell: Getting to the specifics, for 2025 we expect revenues between $16.9 and $17.3 billion.
Tom Bell: reflecting growth of up to 4% over fiscal year 2024 consistent with our prior messaging of low single-digit growth but off of a much higher 2024 baseline.
Tom Bell: Our guidance accounts for the ongoing, continuing resolution in a continued pivot away from low-margin work.
We anticipate fairly balanced revenue growth across the segments.
Tom Bell: We remain committed to margin expansion over the long term and see potential for higher profitability in all of our segments over time.
Tom Bell: Regarding non-GAAP diluted EPS between $10.35 and $10.75, which assumes an effective tax rate of 23.5% to 24%, and share repurchase activity roughly consistent with last year.
Tom Bell: In terms of cash, we expect operating cash flow of approximately $1.45 billion. From a free cash flow perspective, we're targeting capital expenditures of approximately $230 million, or about 1.3% of revenues.
Tom Bell: This generation provides plenty of capital to allocate while also funding growth investments.
With that, Operator, we're ready for questions.
Tom Bell: Thank you. We will now begin the question and answer session. To ask a question, you may press star 1 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, simply press star 1 1 again.
Tom Bell: As a reminder, please limit yourself to one question before getting back into the queue.
Tom Bell: At this time, we will pause momentarily to assemble and roster.
Speaker Change: The first question coming from the line of Matt Eckers with Wells Fargo. Your line is now open.
Speaker Change: Hey guys, good morning. Thanks for the question. One thing that came up on a couple of the other conference calls this quarter, maybe some of the disruption around the new administration, some of the DOJ efforts. I think there was a period where they could sort of try to pause.
Speaker Change: federal spending at this point a couple weeks ago. I'm curious if you saw any disruption I guess kind of in Q1 so far and if so if that that's kind of behind us or you're still keeping an eye on that.
Thanks for the question, Matt. Good to hear your voice.
Speaker Change: the short answer is not really. There's been some, let's call it disturbances in the force, perturbations, customers that are obviously trying to understand the environment themselves and that caused some
Speaker Change: day-long, two-day long pauses in contracting vehicles, but then that picked right back up. So we think our customers are adapting to the current environment. They're figuring themselves out and they're proceeding at pace.
Okay, thank you.
Thank you.
Speaker Change: Our next question coming from Delilah. We're in Paris now with Bank of America. Your line is now open.
Good morning, everyone.
Speaker Change: Hey Mariana. So my question is about a focus on border security and the Iron Dome.
Speaker Change: You guys have, like, capabilities across the board from, like, screening solutions to, like, counter UAS or, like, air defense systems. Like, how do you see that playing out and where Leidos can actually have an opportunity from this project?
Speaker Change: Thanks, Mariana. Yeah, both that you mentioned are, again, right in our wheelhouse. And, in fact, just yesterday afternoon I was up on Capitol Hill working one of them. I won't tell you which one.
Speaker Change: but both of them are areas where we've prepared some big ideas that we have been putting forward to the administration and to the senior stakeholders.
As you say
Iron Dome and the executive order on Iron Dome.
play to everything we do.
Speaker Change: all the capabilities that are requested in Iron Dome for America.
Speaker Change: from space surveillance and understanding to counter-effects for incoming cruise missiles and hypersonic weapons.
Speaker Change: right in our wheelhouse of what we do. So that's one of the reasons we are really focused on it because the Space Development Agency has asked for RFI responses within 30 days and our team is laser focused.
on answering that mail with.
compelling, really
adroit, to use Chris's word again,
Speaker Change: opportunities to satisfy that need quickly and affordably for our customers.
Speaker Change: on border security. Obviously border security is a huge area of focus for this administration and it plays again right to our wheelhouse from the equipment at airports to the equipment on borders and the equipment necessary to see low-altitude UAVs coming across borders.
Speaker Change: Everything I just spoke of is again right in Leidos' wheelhouse, so again another reason we're so optimistic that this environment and this administration's priorities
Speaker Change: present tremendous opportunities for LITOS growth in the future. We're focused on
seeding that field with our ideas, the
Speaker Change: Ideas we've had for a long time for better, faster, cheaper solutions to these customer challenges, and we're finding now in this environment a very very receptive set of stakeholders who want to hear from us.
Speaker Change: and are eager to advance that conversation at pace. So, very exciting times indeed.
Thank you so much.
Thank you.
Our next question coming from the line-up.
Sheila Kowalski with Chess Briefs. Sheila in is now open.
Speaker Change: is fairly high. Maybe can you talk about BBA since you've tackled DOJ head-on. The BBA Recompete was awarded earlier this year. How we think about that next phase of the program, both the top line and bottom line contribution and what the additional
provider if it changes the outlook at all.
Speaker Change: Thanks, Sheila. Yes, we're very excited to have booked that substantial award for the continuation of our work there, and as I said in my prepared comments,
Speaker Change: The award we received gives us the confidence we can liquidate that order profitably in line with what we held out to you last quarter.
Speaker Change: Yes, there is a new entrant into a few of those regions.
Speaker Change: as a participant we dealt with in one of the regions already.
Speaker Change: Obviously, we're looking forward to our scope, our scale, our technology to continue to allow us to have the volume and the profitability of that business that has satisfied our customers to date.
Speaker Change: And so, over time, we'll have to adjust to a playing field that changes, but for 2025 and 2026, we feel very confident in our ability to execute that program along the lines that we have held out.
Speaker Change: I will say, though, this. North Star 2030 and its growth pillars...
Don't just rely on our growing our medical exam business.
Speaker Change: The growth pillars, as I said in my prepared remarks, are all about where we know strong customer demand is growing.
Robust profitability exists.
and Leidos differentiation is evident and accelerating.
Speaker Change: Those are the three things that we picked our growth pillars for. Those are the areas in Leidos we're now investing differentially in because we know that's going to bring us differential top line and bottom line results.
Speaker Change: across a wider suite of capabilities within LITOS. And so we're very excited about Northstar 2030, its growth pillars.
broadening the number of programs that are
Speaker Change: a high top line growth and bottom line growth and very excited about that. Chris, anything you'd like to add? Yeah, I mean, Sheila, obviously the teams have been building towards.
Chris Cage: as we could be for some time. And we've been innovating and investing to drive efficiencies into our process. So we've won a competitive position. As Tom mentioned, you know, another new entrant, that's fine because the demand signal is very robust.
Chris Cage: so you always got to continue to prepare for that. But for this year, it gives us a great platform to continue the momentum that you've seen out of the health business in that direction.
Thank you.
Great, thank you.
Thank you.
Speaker Change: Our next question coming from the line of Gautam Khanna with CD Coway. Your line is now open.
Hi, good morning guys. Hi.
Speaker Change: Hey, you guys obviously guided 2025 and have a longer term view as well with the North Star.
roadmap. I was wondering if you could opine directionally on...
Speaker Change: bookings this year and maybe the growth reacceleration in 26 and beyond you know where do you think we end up kind of mean reverting back to?
Speaker Change: Given the strong performance last year, it creates a tough compare for this year. But, you know, kind of more regular, looking out beyond 25. Organic growth and however else you want to take it.
Speaker Change: Thanks, Gautam, and good to hear your voice and a pleasure to meet you. Thanks for initiating coverage of us.
Speaker Change: Let's see. Obviously, we're very proud of the December quarter we printed, a 1.7 book-to-bill ratio. And typically, the weakest quarter gives us tremendous wind in our sails coming into 2025 and 2026. And the 1.4 on the whole year, our best year since 2020, again, gives us great confidence.
The business development team at Leidos has been fundamentally retooled.
We have a new approach to how we're...
pursuing market opportunities and positioning Leidos for win.
Speaker Change: That includes technologies like AI in our proposal activities. And so we're deploying AI internally and externally to have better outcomes.
And I think that's what you're seeing. So...
Speaker Change: While our chief growth officer will be retiring in a couple months and we thank him for helping us win back our
Speaker Change: our chutzpah in this area, we're going to be not missing a beat and continuing to improve our performance.
Now, obviously, right now we're dealing with a continuing resolution.
Speaker Change: That suppresses the amount of orders we see coming out immediately. But we're very hopeful that as the reconciliation package and the budget package moves its way through the administration and the Congress,
Speaker Change: that this year will normalize and new orders will start to come in and we're very excited about the future.
Boo!
Speaker Change: a bunch of programs with very long legs and very long opportunities for
Speaker Change: single award IDIQs to have new task orders for many years to come. And so it's not just winning awards, it's also then on contract growth. Another area where we in Leidos have been investing in our expertise at
Unlocking on-contract growth within program officers.
Speaker Change: Chris, anything you'd like to add? Obviously, you're trying to get at the heart of the matter, Gautam, and looking ahead to our Investor Day. And we feel the story will be compelling. And those...
Speaker Change: Financial expectations are set. We've spent time building that up and you can believe that we see the pace of activity accelerating as it relates to our growth.
Speaker Change: and when we have an opportunity to sit down with you all and go through that I think you'll see
Speaker Change: You know, our momentum that Tom just talked about on business development coupled with our ample capacity from a cash generation and quality balance sheet perspective, we are very well positioned to build significant momentum over the next four years.
Thank you, guys. Thank you.
Good morning. Hey, Louie. Hi, Louie.
Speaker Change: Hi, you discussed several positive wins for the Dynetics Leidos business with it picking during shield and common hypersonic glide body I was wondering what is taking place with
Speaker Change: MockTB 2.0, Kratos put out an announcement and they listed you as a teammate and I was wondering, did you transition from being the prime on that program to a subcontractor?
Speaker Change: Yes, on Mock TV 2.0, we're subbed to Kratos and happy to do that. And yes, you're right, we were prime on 1.0.
But
There's sealing available still to us on 1.0 and so
Speaker Change: We're not letting go of our opportunity to serve our customer there and there's significant role work share that exists for us.
Speaker Change: as a sub to Kratos on 2.0. So we we know Kratos very well. We we like working with them and we feel this relationship will help us advance this capability for our nation at pace and in the end that's what it's all about.
Thanks, and on your April earnings call,
Speaker Change: You indicated that you secured a multi-billion dollar classified takeaway that was under protest. Can you update the investors on the call on the amount of awards that are under protest and was this specific contract...
put into backlog over the past two quarters.
Speaker Change: So the answer is we prefer not to indicate how much is under protest because talking about protests isn't our jam.
But the answer to your second question is no.
Speaker Change: We don't put contracts under protest in our backlog. Those are still waiting in abeyance.
Okay, so that particular contract still hasn't been adjudicated?
Correct.
Okay.
Speaker Change: Thanks. And one last one, if I may. For your Enduring Shield IFPIC system, it's obviously gaining traction. Is that system viable to be deployed?
domestically and that it seems that it's...
Speaker Change: meant for cruise missiles and counter drones but do you think that there's a market for that domestically or is it better suited overseas and you know if it's not viable domestically what products in your
portfolio could fit into the Iron Dome.
initiative. I know that you provide the sensors for
Speaker Change: the proliferated warfare space architecture. So that is definitely suited, but what else?
could be applicable.
Speaker Change: Yeah, thanks for that Louis. So the answer is of course it can be deployed along any border that you are worried about cruise missiles or unmanned vehicles being a threat.
Speaker Change: So, domestically, internationally, any country's borders, and yes, that is a big part of our Iron Dome value proposition to our customers.
Thanks, Louie.
Speaker Change: Thanks. Thank you. Our next question coming from the line of Colin Canfield with Cantor Fitzgerald. Your line is now open.
Speaker Change: Thanks for the question. Great to be back. Can you level set us on what you're assuming for FY26 budget requests? Feedback from GetDC that we're getting is that it looks like 10% nominal is probably a good base case.
Speaker Change: With SAS leadership looking for $200 billion a year on your increase, so maybe talk us through kind of what you're expecting in terms of top line for FY26 requests and how you think about that flowing through to your programs. Thanks.
Speaker Change: Thank you, Colin, and welcome back. Appreciate you reinitiating guidance on us. The answer is I don't expect anything at this point.
Speaker Change: agendas moving and exactly where the DOD budget ends up is is one of those factors. I think there is
bipartisan support that
Speaker Change: The world isn't getting to be a safer place and that the defense budget
needs to go up, but...
Speaker Change: We're focused not only on what top-line growth that gives us in new opportunities, but also helping unlock savings in the rest of the defense budget portfolio. You know, I mentioned in my prepared remarks the Defense Enclave Services opportunity.
Speaker Change: to not only make these DAFAs more cyber secure and more resilient, a better user experience, but unlock tremendous savings for the new Secretary of Defense to deploy for
Speaker Change: growth in, you know, weapons that are the pointy end of the spear.
Speaker Change: And so we're focused not only on the top line and what it'll be for 26-27, but we're also focused on unlocking savings that can be reinvested by the new Secretary of Defense and this administration in that future to augment whatever top line growth they get.
Speaker Change: We'll know more about what exactly we expect in 2026 and 2027 in six months or so, but obviously between now and then we're focused on our growth pillars.
Speaker Change: We know that those growth pillars are independent of specific top-line growth because they are enduring existing customer demand that we know is growing over time. So we feel very good about the strategy we've laid out to grow in 2025, 2026, 2027, and 2028.
Speaker Change: Thanks. I want to keep it to one, but just picking on that FY26-27 comment, are you suggesting that the proposal is going to be a two-year budget deal like we've seen in the past?
Speaker Change: There are people on Capitol Hill that are talking about that, but I'm not basing my expectations that that will come to pass. We'll see.
Thank you.
Gavin Parsons: And our next question coming from the lineup, Gavin Parsons with UBS. Your line is now open.
Thanks guys. Morning. Morning.
Gavin Parsons: In terms of the long-term EBITDA and cash flow outlook, you know, when the VBA contract transitions to its next iteration, will you be able to still grow EBITDA and free cash flow through that contract transition?
Gavin Parsons: Hey, Gavin. Chris here. So, absolutely. But as Tom talked about, I mean, we're already building momentum in other areas to complement what happens with VBA. And that mission is not going away, but we...
Gavin Parsons: Imagine that there'll be an opportunity to continue to innovate there, to drive more efficiency and automation through the whole delivery chain, but absolutely our expectations will be growing EBITDA over the time horizon as we've been alluding to. You know, we'll give you our point of view.
Gavin Parsons: through 2028, where we see the business going. But the growth pillars are robust and there are plenty of other areas that will build momentum in the health and civil business along with our other segments.
Great, thank you.
Thank you.
Speaker Change: Our next question coming from the line of Scott Minkus with Milius Research. Your line is now open.
Scott Minkus: Good morning. I have a question on the guide. In 2024, you did $10.21 in EPS.
Speaker Change: And if my math is correct, I think you had a 20 cent impact from the 2Q charge, the UK business, and roughly an 11 cent impact from the asset write-down this quarter. So if I add those back
Speaker Change: the guidance implies almost no underlying EPS growth. I'm just kind of wondering is that conservatism based on the change in administration or any sort of color you can provide?
Speaker Change: Yeah, hey, Scott. Thanks for that. And you know, you're right. Of course, we don't expect, you know, some of those things to repeat. Of course, running a business
the pivot year for the future while delivering great performance.
Bell.
Speaker Change: That we do expect that we'll be refinancing, you know, the interest rate environment's a little bit higher. So we'll see it's a small headwind on interest and taxes that factor into the EPS guide as well, but
Speaker Change: But yeah, so I think you know you you sleuthed it out The only other thing I'd add we had an excellent year on EAC's on balance aside from those two larger things that you pointed out And the goal of the team is to continue to do that, but there's always you know
Variability in the portfolio you have to allow for.
Speaker Change: Okay and then Tom, you mentioned that the new administration wants to increase privatization. So although a new competitor has been added to the VBA contract in some of your regions,
Speaker Change: Do you think that that increased competition could be offset by a greater share of exams being outsourced?
Speaker Change: Well, that'll be up to the new administration and the new cabinet-level appointees and the people running the agencies.
Speaker Change: What we're focused on is making sure we maintain and grow our market penetration by providing excellent service to veterans.
Speaker Change: We will be there very eager to help our customers think that through.
Thanks for taking the questions.
Speaker Change: Thank you. Our next question coming from the lineup, Seth Slaffman with JPMorgan. Your line is now open.
Hey, thanks very much and good morning everyone.
Speaker Change: I wanted to ask about the growth pillars you think about for North Star 2030.
Tom, and how you...
the extent to which you think about
the challenge of
Speaker Change: profitable growth when you've got some some new competitors coming into the space with you know very low cost of capital that are evaluated primarily on their ability to deliver very fast growth and kind of the extent to which you're thinking at all or how you're thinking about the challenge that poses to delivering profitable growth.
Yeah, thanks Seth. We certainly are aware of
Speaker Change: these new entrants into the marketplace, and we welcome them. And in fact, we work with them in many occasions. So we see them as part of the ecosystem that we're eager to work with to deploy better, faster, cheaper solutions for our customers.
Speaker Change: That being said, our growth pillars, again, are all founded on areas we know we have differentiated capability and we know we can accelerate away from the pack.
Speaker Change: So, we're looking at growth pillars where we know we have something others don't.
Speaker Change: And yes, others might have low cost of capital and ability to build it over time, but we have these capabilities now.
Speaker Change: And so we're very focused in our growth pillars around those markets and those customer needs and those areas where
We know we have a differentiated capability and
Speaker Change: We're very excited about our ability to accelerate away from the pack in those areas.
Speaker Change: Not overly concerned, and at the same time, looking for us to deploy.
Speaker Change: Our unique brand of partnership, we're always open to partners, we've always been open to partners, and we'll remain open for partners as we try to solve our customer problem in different ways.
Great. It's very helpful. Thanks. Thanks, Seth.
Speaker Change: Thank you. 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. Thanks for taking the question. Sure.
Speaker Change: I wanted to ask you, you mentioned earlier a pivot away from low-margin work next year. I just wanted to dig in a little bit on, you know, what exactly does that mean and are there implications for mix-by-contract type? What sort of work does that involve? Thanks.
Speaker Change: Yeah, thanks for the question, Josh, and yes, the corollary to our growth pillars is areas where we're going to de-emphasize in the portfolio.
Speaker Change: We're not turning and walking away from any business we have today because of our robust financial results we've been able to print inside Leidos. We have the ability to
Speaker Change: continue to invest in all areas of the business while we over invest in these growth pillars that I've mentioned.
and over time allowed to attrit. Nothing, nothing, uh...
Speaker Change: No knee jerks here, nothing, no student body left kind of moves. Over time we'll simply...
Speaker Change: leave that work for other people on re-competes. And so look for a gentle, purposeful approach to investing in the growth areas.
Speaker Change: continuing to invest in areas we know where we can grow as we always have.
Speaker Change: and then de-emphasizing some of these areas that are low-margin work and really not something that our customer rewards our innovation, our technology, and our ability to make their outcomes smarter and more efficient. So, that's the long-term playbook over the next three years. Yeah, Josh, you can think of things like, you know,
infrastructure support services.
Josh Korn: as big O&M jobs, things like that. If we're not technically differentiated, you'll see us shift our focus, as Tom mentioned, to the things where there are better opportunities for Leidos and the pipeline there, it remains very robust. And better top line and bottom line growth.
Great, thank you. I'll skip to one. Thanks, Josh.
Thank you.
Speaker Change: Our next question coming from the line of Peter Arment with Baird, Jelena Snalpen
Good morning, Tom. Chris, nice results. Thank you.
Speaker Change: It was mentioned earlier, I think Chris mentioned 43% of your of your Lidos is now a fixed price, but a large percentage of that is in health and civil. How do you think about?
Speaker Change: when you look at your other, you know, national security segments and defense about opportunities to grow your fixed price mix there just given in the environment of DOJ. Thanks.
Speaker Change: Well, we are always open to and eager for outcome-based contracting, whether that's fixed price or whether that's privatization, whether that's paying for a service at a fixed rate. There's different, you know, different tunes you can play within that song.
Speaker Change: But I'm eager to grow that. I think we excel at that today. I think we've got a demonstrated track record of
Speaker Change: providing dramatic cost reductions for our customers and great profitability and revenue growth for our shareholders. And so the Leidos team is all about that.
Speaker Change: That's because we can unlock technology. When we own the outcomes, we own the inputs and the technologies that we can deploy into these areas that allow us to
Speaker Change: differentially serve our customers and have better results for them. And so we're very excited about it and leaning into it.
You know, Doge, the administration.
I'm very happy that the conversations have begun around
Speaker Change: increased privatizations and increased opportunities for outcome-based contracting because I think that's an area that Leidos can excel.
Speaker Change: Yeah, we've seen, you know, some of it, Peter, in the defense space, less than we'd like.
Speaker Change: But in our digital modernization business, for example, a cost per user or a cost per person on the network. And, of course, some of the things we talked about in our defense systems area, you know, in support of Iron Dome and some of those opportunities will ultimately be
Speaker Change: a fixed price production outcome. So you know again we're up for it. We invested robustly in our program execution capabilities and so this is a direction that we want to be on.
Appreciate it on the call, thanks guys. Thank you, Peter.
Thank you for watching!
Speaker Change: Thank you. There are no further questions in the queue. This concludes our question and answer session. I would now like to turn the conference back to Stewart Davis for any closing remarks.
Stewart Davis: Thank you operator for your assistance on today's call and thank you all for your time and interest in LITOS. We look forward to updating you again soon. Have a great day.
Stewart Davis: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.