Q2 2025 Leidos Holdings Inc Earnings Call
Greetings, and welcome to Leidos' second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. To ask a question during the session, you will need to press star 1, 1 on your telephone. You will then hear an automated message advising you that your hand is raised to ask your question. Please press star 1 on 1 again to withdraw your question.
Please be advised that today's conference is being recorded, I would now like to hand the conference over to your first Speaker, Stuart Davis from investor relations, Stuart you may now begin.
Thank you and good morning, everyone. Joining me on today's earnings conference call are CEO Tom Bell and CFO Christopher Cage.
Today's call is being webcast on the investor relations portion of our website where you can find earrings, press release and the presentation slides for today's call.
As shown on slide 2, our discussion today will contain forward-looking statements based on the environment as we currently see it. And thus includes risks and uncertainties. Our press release contains more information on the specific risk factors that could cause actual results to differ materially from anticipated results.
Turning to slide 3 will also discuss both gaap and non-gaap financial measures. And today's press release and presentation slides contain. A Reconciliation between the 2.
And now, let me turn the call over to Tom, we'll begin on slide 4.
Thank you, Stuart, and thank you all for joining us today.
I'm pleased to speak to you all against the backdrop of our truly differentiated Q2 results.
We've recorded robust Revenue growth, 4.8% year to date.
Record profitability. 15.2% debit of margin this quarter?
And robust, operating cash flow up 28% this quarter.
These results are, especially gratifying given the dynamic Market environment through which we are navigating.
Behind this performance is our proactive enactment of intelligent austerity measures.
A team that is leaning in to our unparalleled, customer understanding and engaging customers as their partner.
To create smarter and more efficient outcomes.
Our wrapping technology Ai and all our golden bolts, even more aggressively around all our products and services to enhance our customers effectiveness.
And completely aligning. All of Lidos around our Northstar 2030 strategy.
It is because of this that I'm also pleased to be able to raise our full year guidance for 2025.
As you recall, our Northstar 2030 strategy is comprised of 5 growth pillars, space and Maritime energy infrastructure, digital modernization and cyber Mission software and Managed Health Services.
Our determined ongoing engagement with customers continues to validate these Northstar 2030 growth pillars.
In fact, the significant multi-year funds provided by the 1, big beautiful, Bill speak directly to our Northstar 2030 growth pillars and our core Lidos capabilities.
With the 1, big beautiful, bill now, law and the administration's priorities. Now, clear, our customers are moving out to execute programs for essential missions, right? In our wheelhouse,
These include our Space and Maritime growth pillar supporting a wide range of needs in the Golden Dome initiative.
Along with our Global Air Traffic Control experience, being tightly aligned to the faa's ambition for a brand new air traffic control system.
The TSA embarking on an ambitious airport. Screening modernization effort which is tightly aligned to our capabilities in our airport security business.
the Department of Homeland Security, receiving significant additional funding validating, our ongoing investments, in our ports and border security business, as well as our Cutting Edge counter drugs capabilities,
And the drive for improved Health outcomes and better service to our nation's veterans. Speaking directly to our Managed Health Services growth fillers
all in all. It's indeed a very exciting time for all of Lidos
Now, I'd like to take a few minutes on this call to highlight the maritime component of our space and Maritime growth pillar.
Over the coming years. The US Navy plans to rapidly deploy a larger integrated Fleet of manned and unmanned Vehicles. A direction that closely aligns with our strengths in Maritime autonomy.
This enhanced Battle Force will not only prepare the US for future challenges, but also Revitalize, the US ship building industrial base.
Leidos is full life cycle. Maritime capabilities are unmatched to meet this need.
Lidos is the only company that possesses world-renowned Naval architecture capabilities.
Proven experience Fielding successful. Autonomous Maritime vessels.
Demonstrated capabilities in state-of-the-art Maritime autonomy. AI
and experience in designing and integrating packaged mission payloads,
So, loss is in a pole position to support the expansion of the U.S. Navy with an autonomous maritime fleet.
The fiscal, 2025, reconciliation bill.
Allocated robust funding for autonomous vessels along with related, autonomy and battle management software.
Let me highlight a few examples of the role lytos is already playing in this area.
First, the U.S. Navy has contracted Leidos to survey commercial ships for future potential conversion to high-performance mission-ready autonomous medium unmanned surface vessels.
Second. The US Marines have a desire to scale up production of losses. Low profiles, small unmanned surface vessel sea Spectre to support. Expeditionary Warfare, particularly in the indo-pacific.
The U.S. Marines currently have 3 Sea Specters in operation and have praised their low-profile approach and capacity for missions in contested environments.
And third, a classified customer has contracted with Lidos to procure 1 dozen seed. Darts.
our low cost at tribal unmanned underwater vessel to augment their arsenals
The customer has expressed an intent to acquire an additional 70 seed, darts next year with the additional units to follow.
This opportunity further positions, Lidos as a leader within the subsea Warfare domain, critical to our nation's defense strategy.
We have invested in Maritime autonomy for decades. And as a result, our Lidos autonomous vessel architecture or lava is the most trusted and reliable Maritime autonomy on the market.
Lava has demonstrated this endurance, long range capacity and precision while sailing more than 120,000 nautical miles.
This includes our Fleet of Lidos built, M USBS that transited, the Pacific from San Diego to Australia, and back last year.
This journey marked a huge advancement in Maritime autonomy and reinforced our leadership in this crucial domain.
And we are continuing to invest in technology to improve the performance and interoperability of our nation's Maritime capabilities.
Our team is adding our proven battle management software, Alpha, and Mozaik software, originally developed to optimize battlefield and airspace strategies, to our maritime command and control capabilities.
Simultaneously, our NATO allies are increasingly acknowledging their escalating maritime threats and, therefore, the imperative to modernize and prepare their maritime forces.
This collective, global focus presents a nearly $4 billion pipeline for Leidos over the coming years.
These opportunities, the new administration's Playbook is clear.
Disrupt old models drive out costs and deliver more efficient Solutions.
We share that passion and our thrilled to have a receptive. Customer eager for technology adoption.
For some time, Los has been deploying trusted Mission AI to our own business to lead our own positive disruption.
We've been putting AI to work for us for years.
And the results are extremely encouraging.
Our AI work is on track to save more than half a million labor hours by the end of this fiscal year.
And we're just getting started.
Let me give you a few examples of this work in action.
In our Growth Office, we're using generative AI to help write better proposals faster.
In this regard we've already achieved. Some 20% greater efficiency on tasks common to every large proposal in finance, we're using Advanced automation to expedite our cash flow process and as a result have decreased invoice, Bill and delivery time for select customers by almost 40% while driving down error rates,
And we've enabled over 1,000 software, developers with AI, powered coding tools.
For these coders, we've seen an over 30% reduction in the time, it takes for them to deliver ready to test code.
And using these same Lidos AI tools deployed at the FAA, we've seen a 60% increase in development productivity. This brings me to my final point today.
The government is now transitioning from policy to productivity.
This Administration came in with a clear objective to drive efficiencies and attack the status quo.
And as discussed on our last call, that's fertile ground for Lidos and core to our business model.
Now, I'm pleased to report that we continue to have success positioning Lidos as part of the solution, not the problem as this Administration moves quickly to make government outcomes smarter and more efficient.
and it's apparent to me, through the Myriad of C, cabinet level engagements, I've had to date that this Administration is seeking to work with agile forward leading solution providers, like Lidos
Our customer decision environment is also improving.
Our 0.9 book to Bill ratio in the second quarter was a strong Snapback from q1.
And more than half of these awards were for new and takeaway business.
Late in the second quarter. We were notified that we were also awarded another multi-billion dollar takeaway within the intelligence community.
but as happens that contract wasn't definitive for several weeks,
Had the contract been finalized in June instead of July, our Q2 book-to-bill ratio would have been 1.3, and our backlog would have increased by 4%.
Looking ahead, our pipeline of opportunities remains robust, and we expect much greater rewards pace in the back half of this year.
It also Bears mentioning today that I am encouraged by the first fruits of our kudu acquisition.
As a result of the fast integration of Kudu into our business, we've already added $400 million in pipeline opportunities that neither company was pursuing separately.
And we are convinced that with the combined Lidos kudu capabilities, we we've now driven up probability of winning on another 2 billion dollars of near-term submits.
Given our improving Market backdrop, we're confident in our ability to deploy Capital to activate our strategy and benefit our shareholders.
As we execute our Northstar 2030 strategy, we will continue to be on the lookout for constructive Acquisitions. That support our growth pillars and offer a compelling return on VA on Capitol,
At the same time, our confidence in future cash flows enables us to remain multifaceted in our Capital deployment philosophy.
So consistent with earlier indications, we will undertake additional share repurchases and Debt Pay down during the back half of this year.
so, in summary,
We are fully executing our Northstar 2030 strategy.
We're seen as part of the solution in the drive for smarter and more efficient government outcomes.
And our customers have the funding and the conviction to move forward boldly in areas that speak to Lidos core capabilities.
2025 Outlook.
Chris.
Thank you, Tom, and welcome to everyone joining the call this morning.
With the first half of 2025 in the books, we've shown what our differentiated and diversified portfolio can achieve.
Over that period. Each segment expanded margins and delivered mid to high single-digit growth.
And we think the best is still yet to come for loss.
From the 30,000 foot View, the second quarter looks like. Los just being lytos. Another quarter of beating expectations to deliver top tier earnings in cash flow growth,
but this quarter was anything, but business as usual,
On the May call, we estimated the 2025 Revenue impact from Administration efficiency actions to be about 1%.
That remains true today, and that impact is spread roughly evenly across the second, third, and fourth quarters.
Complicating our growth Story, the procurement process was severely constrained. In the first several months of the new Administration.
We've been able to overcome those obstacles by obsessively delivering on the administration's Innovation, inefficiency agenda.
For example, many customers are looking to drive down IT costs as part of their efficiency imperative.
After initially focusing on canceling contracts and reducing scope. We've now seen a pivot to consolidating contracts to increase accountability and lower the all-in cost of the government.
We've offset, a large part of our Doge, headwinds by using our scale.
Breadth of capabilities and unmatched contract portfolio to Aid. Our customers in an enveloping new requirements, onto our existing contracts where we have expansive scope and Sealing
with that as a backdrop. Let's take a closer look at this, quarter's performance, starting with the income statement on slide 5.
Revenues for the second quarter were 4.25 billion up 3% year-over-year and up sequentially. Despite the headwinds from award delays in ongoing contract reviews,
Profitability was where the urgency in the discipline of the team shown brightest.
Adjusted Evita was 647 million for the quarter up 16% year-over-year and adjusted Eva do margin increased 170, basis points to 15.2%.
non-gaap diluted EPS grew 22% to 3.21, well surpassing last quarter's record, high of $2.97
Reba, do margin in the quarter was our best ever by 100 basis points.
Let me unpack that a little to give you some more insight into how we accomplished that level of profitability and what is likely to be sustainable going forward.
The core drivers were our contract portfolio. Solid execution, and deficient operations, which we should maintain for the foreseeable future.
The second quarter included in 8, million benefit from EAC adjustments, which is actually 3 to 4 million dollars less than our average quarterly performance.
In as Tom described, we're heavily focused on leveraging the power of AI and automation to drive down indirect expenses to improve profitability and competitiveness.
However, we did have some favorable 1-time items that lifted earnings in the quarter. Most notably we received a 255 million insurance reimbursement for legal costs and an 8 million dollar tax refund from prior year state tax filings.
Equally important for the first 2 quarters of 2025, we proactively metered spending throughout the company which was appropriate for these unprecedented times.
Given the uncertainty surrounding the new Administration in a host of new EOS, we maintain tight controls on our indirect expenses.
as the customer environment is beginning to settle, and the pace of procurement is now picking up, we expect to return to a more normal level of spending and also aggressively investing to capture market, share
Turning to the second drivers on slide 6.
It is clear that each of our segments contributed to our impressive results.
National Security and digital revenues increased 3% year-over-year.
From the second half of 2024 are now ramping, and we're seeing additional tasking on large franchise programs like debts.
Building upon the award momentum. This segment was the primary bookings driver in the quarter. So we look for growth to sustain despite some continued Doge headwinds for select digital modernization programs.
Non-gaap operating income, margin of 10.4% was unchanged from the prior year quarter.
Kudu was minimal as expected.
The team has done a great job with the integration so far and we're very excited about the opportunities. This acquisition is unlocking
health and civil revenues increased 1% year-over-year and non-gaap operating income. Margin was 24.9%.
Sustaining the high levels of performance was enabled by the continued high. Throughput of medical disability exams and our team maintaining its laser focus on delivering excellence in innovation.
In commercial international revenue, increased 1% year-over-year from continued demand, sees steady performance in our commercial energy business and improved execution and contract growth within our UK business.
Topline growth was tempered by last year's hardware refresh in our Australian IT line of business.
Non-gaap operating income, margins for 8.5% up 780 basis, points year-over-year stemming from the anniversary of the write Downs on UK, programs in the prior quarter and the more favorable product mix within sees.
Last but certainly not least defense systems Revenue saw the highest growth increasing 10% year-over-year from increased volumes on FDA wide field of view. Tranche 2 and integrated. Air defense programs. Like if pick increment 2 and the electronic warfare emission, support program called out in the earnings.
Press release.
Non-GAAP operating margins of 9.8% were down from Q2 of 2024, but up sequentially.
We continue to track towards sustainable double-digit margins in our defense systems business.
As we look ahead, we are confident in our differentiated capabilities to support key priorities like Golden Dome and maritime.
Moving on to the cash flow to cash flow in the balance sheet on slide 7.
In the quarter, we generated $486 million of cash flows from operating activities and $457 million of free cash flow, for a free cash flow conversion of 110%.
During the quarter, we completed 2 major Capital deployment activities.
First, we closed the kudu Dynamics acquisition for preliminary. Purchase consideration of 291 million, net of 29 million of cash Acquired and second we finalized the $500 million accelerated share repurchase on May 20th retiring over 3.6 million shares at an average price of 138.44.
These actions are perfect examples of what we're looking for. As we use our balance sheet to grow shareholder value,
Opportunistically putting about half of our operating cash flow for the year to work to turbocharge our access to a fast-growing market and to take down shares at very attractive prices sets us up well going forward.
we ended the quarter with 5.1 billion of debt for a gross for leverage ratio of 2.2 times, and 930 million in cash and cash, equivalents
The strength of our balance sheet offers ample capacity for additional Capital deployment aligned with the Strategic priorities, that Tom laid out.
We will continue to monitor the market and, as appropriate, balance debt, pay down capability, and focus on M&A, additional share repurchases.
Finally, on to the forward outlook on slide 8.
As you all are aware the customer environment during the first half of the year has been somewhat unsettled.
While some disruption may continue as Tom outlined awards, are picking up in the administration is clearly moving forward.
We now have greater Clarity and conviction about the near and long-term future for Lidos.
As a result, we're very pleased to raise and narrow our guidance for the year across all metrics.
On Revenue, we're raising the low end of our range by 100 million and the midpoint by 25 million, for a new range of 17 to 17.25 billion.
So, Tom and I are confident in the trajectory of funding in ongoing contract reviews. We have experienced some Revenue reductions and we believe it's prudent to account for some potential customer delays and other unknowns.
Our performance today gives us high confidence in our ability to deliver on margins and earnings.
We are raising our adjusted Eva margin guidance. From mid to high 12s range to Mid 13s.
As a result, we now expect non-GAAP diluted EPS between $0.11 and $0.15 and $11.45.
So, we are narrowing the range by $0.10 and increasing the midpoint by $0.75.
Normal indirect spending in an uptick in Investments, we plan to make for the rest of the year to drive future growth in capitalize on the administration's priorities that are highlighted in and funded by the 1 big. Beautiful bill.
Lastly we are raising our operating cash flow guidance by 200 million from 1.45 to 1.65 billion.
The increase for Flex of about 50 million from better, Evita performance, and 150 million from the tax changes. In the 1, big beautiful Bill. The allow us to immediately deduct some previously capitalized R&D costs.
All in all the team has again. Showcased its Drive in agility through dynamically evolving High Tempo times.
We remain confident in our outlook for 2025 and beyond as we execute our NorthStar 2030 strategy.
With that operator, we're ready to take questions.
If you are using a speaker-phone, please pick up your handset before pressing the keys, please limit yourself to 1 question before getting back into the queue to withdraw your question. Please press star 1, 1 1 again. At this time, we will pause momentarily to assemble our roster.
The first question comes from the line of Toby Selmer with truist. Your line is open. Please go ahead.
Thank you. I was hoping you could uh speak to the potential Financial impact on the company. If the
New GSA initiative to purchase commercial software and services directly from vendors rather than integrators. Um, maybe talk about it from a pass-through perspective, which sometimes occurs, or when it's embedded in contracts.
Um, that that would be helpful. Thank you.
Sure thing. Toby, thanks Tom here. I'll start and maybe hand it over to Chris for some additional details. Um, we see uh generally speaking, we see the GSA, taking a bigger role in government procurement as positive for the market and for the industry. Um,
They're a professional procurement organization and they tend to meet their schedules and have consistent outcomes. So, uh, that's good for us and they are also prefer commercial Behavior, which again is, uh, right in our wheelhouse frankly, uh, we love outcome-based commercial contracts, and we're thrilled to, uh, engage with this Administration throughout, uh, to increase that level of exposure, uh, for Lidos. So,
You know, generally speaking we see ourselves as what the GSA is looking for more of not less of. And uh we think we have uh a good a good opportunity to grow our business as a result, specifically to what you're talking about, uh, from a hardware software standpoint.
Uh Crystal maybe talk more about the details of it but uh we're not a value. Add reseller, we're not a consultant. Uh we don't make our money by buying hardware and software and and passing it through on contracts. Our Jam is mission systems and so, uh, anything that lets us
Buy hardware and software or the government hardware and software more efficiently. Leaves more budget space for mission systems, which is really where we have our value. Add so, uh, generally speaking, uh, this is a trend, we're excited about tracking closely staying very uh, close in contact with the GSA and our optimistic about our chances in this environment. Chris. Yeah. Uh, thanks Tom and Tobey. I would just add, I mean, certainly we meet our customers where they are, right? So, you know, depending upon how they want to procure, we're ready to support. Uh, but as Tom said, procuring CS Hardware, software is not how we add value. It's, you know today I'd say it's on the order of, you know, several hundred million dollars on average that gets passed through to customers, sometimes that's part.
Part of a bundled solution and I don't see that changing. They want a particular Mission outcome. But often times if we're, if we are buying Hardware or software is passed through on a Cost Plus or tnm basis those margins are very low and sometimes they're zero. So again it's not a meaningful contributor to losses value, add not a meaningful contributor to our earnings or cash and so you know we can Flex certainly either way depending upon how that situation evolves. But um we'll continue to stand ready to support our customers. In this time, mentioned more, uh,
Through our efforts, we are creating good outcomes for everybody, and that's the path GSA is on.
Thank you.
Thank you and 1 moment as we move on to our next question.
Our next question will come from.
The line of Jonathan siekman with stifel your line is open. Please go ahead.
Good morning, Tom, Chris, and Stuart. Thanks for taking my question. Good morning.
Appreciate all the comments on the big, beautiful bill and the great exposure. You have to uh to these areas. Just love to hear a little bit on how you think about with these demands signals being so strong the opportunities for you to invest organically in the business uh in particular marine and Marine time space, you guys have been really efficient in building a, a great business and a capital light model. But just broadly, where where are the opportunities today to invest, organically, thank you.
Yeah, thanks Jonathan. Um yes, we're very excited about all the opportunities in the big beautiful Bill and like I said, in my prepared remarks
You know, all the priorities of this Administration speak to our growth pillars.
And Corralitos competencies and capabilities. So we're very excited about it. From FAA air traffic control modernization, a huge opportunity for Leidos going forward; TSA screening modernization, a huge opportunity for Leidos going forward, especially if you bundle both of those and think about the airport of the future. We're very excited about the receptivity of this administration.
Administration to Big Ideas like that, the airport of the future and and taking air travel to a whole new level of customer experience. Border security. Obviously is a huge area of focus for this Administration and a huge funded area in the big, beautiful Bill and golden dome is a is a is a big area that our defense systems is very plugged into with General. Good lines coming on board and ramping up that whole program and the shape and structure of how that's going to, uh, defend our homeland in the future. So we're very excited about the whole range of opportunities that the big beautiful Bill gives us
specifically on Maritime. Thank you for asking about it. We're, we're exceptionally excited about that because we started talking to the Indo paycom command, uh, over a year ago about the demands of uh uh of that command uh, in the indo-pacific.
And the requirement for unmanned autonomous vehicles. So we've been frankly investing in and driving prototypes of uh unmanned vessels. We actually have deployed our lava autonomous uh vehicle architecture on over 10 uh vehicles that are are are in the water. And we have a uh a program that we're bringing forward to the Navy that we think combines the need for
A quick build of uh, very agile Maritime. Autonomous vessels with the rebuilding of the maritime industrial base in the United States. That doesn't mean to the specific question. You asked that we're going to get into the ship building business or the shipyard business. We we think there is ample shipyards in America that can satisfy the need for these medium and small usvs. That's the network. We're tapping into to enable them to be a part of the solution around the whole of the nation as opposed to us buying and uh, and or building shipyards. I, I hope that helps with the context, Chris anything to add? Yeah, just a couple points there. Um, you know, beyond Maritime, right? Uh, first of all, to what Tom said demonstration, ready pilot ready this environment begs for what can you show me that you can feel now? And so again, with the guidance that we've laid out for the rest of the year and and looking to the second half part of the
Reason why we're not running it. The same level of elevator earnings is we do see a rich set of investment opportunities that the teams are bringing forward to position ourselves in this environment. We're super excited about that. Secondly, Tom and I just toured, uh, upgrades to our Huntsville campus within the last few weeks, and I'll tell you it's very impressive. The team have laid out a number of improvements to increase throughput and capacity on a number of our product lines there. Many of which are positioned to accelerate as part of Olympic beautiful bills. So, uh,
And and again, to your point, doing all of that in a capital item. So I think we're well positioned there.
Thank you, Jonathan.
Thank you.
Thank you. 1 moment for our next question.
Our next question is going to come from the line of Seth sesemann with JP Morgan. Your line is open, please go ahead.
If you follow up, uh, talking a little bit about the opportunities in in the reconciliation bill. And I wonder if you could maybe rightsize us on the scanning business and and how you view the opportunities there, you know, maybe the size of the business now. And then when you think about the, you know, non-intrusive, uh, border equipment, the TSA uh, and and airport equipment, how you think about, you know, the scale of opportunities, kind of, uh, you know, your ability to capture them and the competitive environment. And, and the time frame, uh, for, for capturing them
Yeah. Thanks Jeff. And uh, you across the spectrum of the big beautiful Bill, like I was just speaking. We we see ample opportunities. Let me let me run down a few numbers for you. Um in the billions of near-term. Addressable funding that uh that we've identified core to losses capabilities, 1 to 2 billion in the FAA modernization, supplemented by annual Appropriations going forward.
2 to 3 billion and autonomous ship building. As I was just speaking with to Jonathan, uh, there's 2 to 3 billion we estimate in non intrusive inspection and Border surveillance equipment. So a a very big Market there, uh, 4 to 5 billion in counter, uas capabilities ground-based, Radars low-cost missiles, hypersonics and other things that will play back into the golden dome. And, uh, you know,
Don't forget about the capacity for a large rural Health transformation, push through the VA that speaks right back to our wheelhouse of how we've positioned our health and civil business, to serve our nation's veterans, and meet them where they are. So we're, we're very excited about the about the range of opportunities that the reconciliation Bill gives us and specific to your question when it comes to border security. Um, obviously, uh, the it was 1 of this administration's, uh, biggest thrusts, coming into office. We've had multiple engagements with Department of Homeland Security.
We feel, uh, as if, uh, we have a very receptive, uh, audience in the Department of Homeland Security around, uh, our capabilities that are ready to feel now, as Chris was saying before, they're, they're not interested in Powerpoints, and, and and Promises. They're interested in seeing capabilities, demonstrated and products that are in production. We have those products, uh, for surveillance and for counter uas and for uh ensuring the safe venues uh in 2026 and Beyond. And so uh the Department of Homeland Security Customs and Border Patrol. Uh, these are people. We're very actively speaking to right now and are very receptive to to what Lidos has to offer Chris. Anything you'd like to
The only thing I just to answer 1 part of your question there. Seth, I mean, that's on the order of a hundred million dollar business for us. I mean, it's an integrated sees business with ports, and borders and Aviation equipment, but as you know, the ports and borders piece goes back decades, that's our heritage and we've been um, you know, serving CBP, TSA other customers for a long, long time. And and look look to continue to expand our offerings to those customers here going forward.
Great. Thank you very much. Thanks Seth. Thank you. And 1 moment for our next question.
Our next question is going to come from the line of Sheila, Kaya glof with Jeffrey's. Your line is open. Please go ahead.
Um, good morning guys. I've been great quarter, uh, the performance, I want to ask a specific question, maybe on health. Um, how do we think about just Health growth going forward? Whether it's the rural health program, Tom, you just mentioned a minute ago. Um, maybe give us an update on dim sum and VBA. And how do we think about the contribution from incentives in the quarter and how we should be thinking about it going forward?
Yeah, thanks Sheila, and thanks for joining the call this morning. Um, let's see, you know, on health and civil. We've seen record volumes of, uh, about 5,000 cases per day in in June. So, uh, there there's a huge volume going through that business and, uh, we are earning more than our 25% share of a, of a of, a 4-way provider down there. Um, so we're very
Very excited about the volume of business. We're doing through, uh, through our health and civil business, and our ability to serve our nation's, uh,
our nation's customers as you know uh the the the better you do, the more referrals you get, the more uh capacity you have the more referrals you get and so this is where based on our performance uh we're excelling
Name is laser focused on uh, driving our performance to be best-in-class and as we've talked about in the past, uh, we're investing in technology, uh, both in the brick and mortar, uh, clinics that we operate. Uh, and the software that creates a, uh, a a, a very, uh, cohesive scheduling, uh, uh, dance between the patient, the clinician and the, uh, and the clinic itself and also our deployment of technology for, uh, the rural exams. As you ask the rural exams are an area where we think we're leading, the pack in the deployment of our mobile clinics. Where again, through sophisticated scheduling software, we're able to deploy those units to meet the veterans where they are so that we serve them, uh, in in ways that, that satisfy them. So, uh, we think we think this business,
Is going well, uh, the, the VA secretary has said he wants to reduce backlog by, uh, uh, 60,000 by the end of the year, so that would be 125 claims a day. So, um, we think there's, there's a, a tremendous amount of work through this year and well, into next year, as we seek to differentiate ourselves to continue to serve our veterans in that way. Uh, Chris. Yeah, Sheila, I would just hit on a couple of other points to
um,
You know, team's done a great work on dim sum as you know. And and you know, after the the second quarter, we were successful in in securing that extension that we had previewed previously for another year, and that just speaks to the strong performance that we've delivered for that customer. And now, as you're probably aware the, they've come out and asked about, um, or put out an RFI to talk about how to consolidate the dod and VA EHR records systems. So that's out there and obviously our teams are looking to ensure that we position ourselves to support those efforts going forward. Um, and then, you know, looking ahead to the pipeline, there's still, you know, plenty of things that we're positioning for uh with the Navy Fleet Family, Support Global North Advice Line. There's several you know, procurements on the horizon that are already kind of in our pipeline capture teams and, you know, looking to how we grow that business going forward, but opportunity-rich environment again, great funding that we see on the rural and behavioral side, uh, sending a strong, demand signal and, you know, we've proven to be uh,
Somebody that the customer can count on to deliver successfully with high performance.
Great. Thank you.
Thank you, and 1 moment for our next question. Our next question will come from the line of David Strauss with Barclays. Your line is open, please go ahead.
Good morning. This is Josh corn on for David. Hey Josh. Once it's
wanted to follow up.
With reception.
You mentioned border security. And and the
For unmanned marine and and uas. But wanted to ask specifically about the funding in the reconciliation for onm. Uh do you have any benefit from uh from the additions to those funds? Thanks.
From onm funding, I'd say that, you know, again, as as that all sorts itself out, there's certainly, um, ongoing programs and efforts that we benefit from from onm funding. And so, you know, that supports the deployed Fleet of equipment that we've already have in place and upgrades and enhancements of those particular units as it relates to software expanded, um, sustainment. Uh, efforts it, it's unclear yet. Whether if any of those funds will be able to be redirected to buying incremental equipment on the onm side, as it relates to the CBP and imports and borders. If that's
Where you're asking that. But, uh, very pleased about all of the opportunities around the uh, the reconciliation Bill. And our teams have dissected that and as Tom, you know, gave you a good walk down. We see a rich environment across many parts of our portfolio.
Thank you.
Thank you. And 1 moment for our next question.
Our next question will come from the mind of Peter armet with beard. Your line is open. Please go ahead.
Um, and and that's very impressive. But as you all know, that's, that's where the game begins, not where it ends, uh, it's no surprise to us that, uh, this Administration, uh, is very interested in commercial technology and outcome-based. And so, uh, we don't see that net net as a, as a, a huge new competition for us. But rather, um, an opportunity for us to also be, that commercial disruptor. We've always been, um, as we've talked about in past calls, uh, loss is core is making go government outcomes smarter and more efficient. Uh, that's still our core today. We're disrupting ourselves. We don't feel like anybody knows how to deploy AI or AI tools better and more effectively than we do. And so, uh, we're looking forward to
Continuing to uh, use AI in our products and solutions for our customers benefits in ways that uh, our trusted by our customers. Um, you'll you'll recall that in past calls, we've we've featured on trusted Mission Ai and we still think that that is a key calling card for Lidos that. Um uh, we continue to lean on the ability for our customers to trust.
The AI, they are deploying in their products and in their Solutions and in their systems is key. And, uh, we continue to get great receptivity in our customers to the conversations. We have about using all the commercial tools available, in a way that also allows them to, uh, uh, trust the outcomes that the products are giving them. So, um, yes, I ordering number, uh, good on them. Uh, but, uh, uh, that, that doesn't frighten me away from the, from the market,
Appreciate the call. Thanks Tom you bet.
Thank you. 1 moment for our next question.
Our next question is going to come from the line of Mariana Perez Mora with think of America. Your line is open, please go ahead.
Thank you so much, good. Good morning everyone. We just gonna be about Dianetics. Um, you receive, uh, 265 million award at this last month for indirect fire protection capabilities and a couple of other Awards. Uh, this business was growing slower than expected. But then, when you, when you bought it, could you please like, tell us like how is that going? What type of margins, they are generating and how do you think about growth ahead, especially as golden dome shapes up?
Sure. Thank you Mariana. And, and yes, uh, the Dynam Dianetics acquisition was a very intelligent acquisition back in the day, perhaps it took a little longer than we might have hoped to uh fully integrate it and get it running. But as Chris kind of mentioned in his comments, uh, we feel like uh now we've got a leadership team there that is very focused on results and its matching the moment of golden dome and all the needs for counter uas capability and surveillance that dynetics has invested in, uh, for for years. And so, um, maybe a little less, uh, robust and uptake after the acquisition, but now, some 4 or 5 years later. Uh, it is really firing on all cylinders and as you allude to, uh, earning idiq, uh, earning uh, production Awards, the if pick, uh, uh, program,
A real key to the defense of Guam and uh Homeland defense going forward, golden dome the connectivity right there. And uh at the space layer, when you think about golden dome, the whole uh tranche 2 of uh, of uh, of our satellite programs is, is really uh, right in the Wheelhouse of constant surveillance. So feel really good about the, uh, the dynetics acquisition and
Double-digit margins in certain quarters. And we're we're certainly on a path to get there and exceed that on a sustainable basis. Um, yes, if pick increment 2 is, uh, is a a program that's accelerating but beyond that, you know, we see Runway to scaling up our Hypersonic capabilities, under the common Hypersonic Glide body. TPS contract is that's moving forward and there'll be more funding there. Uh other programs of record including are shield and progress on our small cruise missile initiative with Black Arrow. So you know, exciting times ahead a number of capabilities that are a maturing and a leadership team there that just really knocking it out of the park.
Thank you. And if I may, I want to do a follow-up on the DHS CVP opportunity that you mentioned related to the 1 B. Beautiful bill just talk about sports and borders and contract uas. But how should we think about the Seas exposure to non in machines, as well as CVP also feels that, that capability?
Yes, on the, we're alluding to that Mariana. I mean, the vas equipment for border crossing uh that's absolutely part of what the team is envisioning being fielded as part of that demand signal complemented by other capabilities that have emerged as Tom alluded to um you know on on air defense and and situational awareness for uh radar systems Etc. So
Um, but the uh the the core non-intrusive inspection offering is well, deployed on the Southern and Northern border. There's opportunities to expand that footprint going forward here. And the team looks to capture, you know, significant share as those Awards come forward in the fall.
And is that it?
Good old elbow grease and great management. I got to give credit to the team that's been in there for the last, you know, 12 to 18 months and really have improved our, our global Service footprint, uh, solidified, our supply chain issues. Um, yes, you know ports and borders is a, is an area that we think is an attractive market. So is that scales up? That's certainly bodes, well, for the future of that business, accelerating profitability as well.
Thanks Mary. Thank you so much.
Thank you. 1 moment for our next question.
Our next question is going to come from the line of calling Canfield with caner. Your line is open, please go ahead.
Hey, thank you for the question. Um, last call, I think the comment that the team provided suggested, um, continued growth and margin expansion over a multi-year, period. Maybe refreshing that view. How does the company think about growth acceleration from call up to kind of underlying guide, midpoint of of 4%?
Growth ex execution, the headaches and then, um, you know, maybe focusing on the on the Civil portion of that specifically like how does the team accelerate civil growth?
And then, um, in terms of the margin expansion that you provided last quarter, is it still fair to assume margin expansion from the updated guidance midpoint this year?
Thank you.
Thank you, Colin. Let me let me start with a little bit on the environment and the and the uh booking environment that we're seeing. Uh as as I said in my prepared remark we had a strong Snapback uh from a from a low book to Bill ratio q1 to a strong uh Q2 that gives us a trailing uh 12 months booked to Bill of 1.3. So nothing to be ashamed of their and a very very exciting uh uh, uh pipeline. We see uh, that our uh our pipeline over the next 12 months is some 70 billion dollars of opportunities and that's Up 3 billion dollars year on year. And also important in that statistic is about 3 quarters of. That is takeaway work. Not recompete for work. We already have but new work for the future. So we see the administration moving on.
Say a onwards and upwards from there. But we're very pleased with that performance and I think you can see what we're capable of with what we just delivered in Q2. So the business has a lot of gas in the tank and as we alluded to defense systems isn't where we see it going to in the end game, you know uh Commercial International improved substantially but there's more room to move up there. So there's still ample levers and parts of the portfolio to drive margin Improvement, but sustaining the mid 13 is, uh, you know, becomes our objective here that we'll focus on moving forward.
And as it relates to growth, I mean Tom just talked about opportunity Rich environment in this health and civil space specifically Managed Health Services as our core growth pillar but the opportunities in the FAA are part of that growth story as well. So we'll give you a lot more color on 26 as we get into the the fall and next next earnings call but uh you can see the momentum is building.
I appreciate the question, thanks.
Thank you.
And our next question is going to come from the line of Gavin persons with UBS. Your line is open, please go ahead.
Thanks guys. Good morning.
Hey.
It's just following up on the bookings question. Seems like total book to Bill pretty healthy here funded, maybe has been trending, a little lighter, any Dynamics to call out there and and a little bit more of what you're expecting into a government fiscal year end, which is typically pretty strong.
Yeah. Hey, thanks for that, Gavin. I mean, uh, first of all, please that you know, year-over-year backlogs up 5 billion dollars, feel good about that. Tom talked about the momentum building the big award that came in just after Q2 was over. So nice, uh, Tailwind going into Q3 and I mentioned also solidifying our follow on extension for our MHS Genesis work. So uh that's that momentum's building pipeline is Rich. You know, funding Dynamics. Certainly there's we expect that to grow and there's been some procurement slowdowns and a move towards more incremental funding and certain customer environments. Uh, that hasn't slowed us down. Um, we expect the air to clear there and things to move forward on on priority programs and obligations, you know, can be lumpy at times. We also had a nice modification in our VBA business to get uh, that funding uh, here in the third quarter as well. So that's a nice uptick in the, the funding environment for that particular program. So you know, I just think it's a symptom.
Some of what we see in the environment. Some slowdowns, some pause take stock incremental reviews, some of that Log Jam is breaking up and and and we'll see that funded backlog position accelerate as we move forward. Yeah. I would just uh, foot stomp that last part of what Chris said. Uh, you know, it's no surprise. We've been talking about it first, 6 months.
Uh, that, uh, there was a certain, uh, constraint of outflow of cash from this, from this Administration during the 6, last 6 months, but now all that is Breaking Free. So, as we think about our funded backlog, it's not a concern for Chris. And I, uh, we we have line of sight to where the funding's coming from. We think we have a good un, un un unparalleled customer understanding working with those customers. And we feel very confident that the money is going to flow to the contracts that represent the great needs that our customers have for our products and services. So, uh, you know, not a not a concern issue for me, right now, as I sit here in August of 2025,
Great. Thank you.
Thank you.
And our next question is going to come from the line of Goddamn Canal, with TD. Cow, your line is open. Please go ahead.
Yeah, thanks. Good morning guys. Hey
Was wondering just big picture. It sounds like the, the aggressive Doge. Um,
engagement with industry is starting to wane a bit is is that
Would you say that's true? I mean, are we not seeing any kind of
Continued. Uh,
I don't know what the right word is aggressiveness, you know, or or kind of heavy-handedness by the, uh,
By the new government with, with the industry. And then as a follow-up, if I could just ask if the, um, if the medical exam, uh, fourth supplier has finally, uh, staffed up in in all 4 regions, not just the 3,
Months while there was a reasonably High slope in that curve during the first half of those 6 months uh, here in the last 3 months that's been flat. So we haven't seen increases and in fact uh that's just gross, disruptions not net. Disruptions as Chris said, the team has done a great job of taking gross disruptions and then turning uh, Lems into Lemonade by working with, customers to understand how we still can serve them for products and services. That they've they've just got to have
And so, um, we're I I wouldn't call it.
Done, um, I I I still think that uh, cost efficiency is alive and well as a part of this Administration, I think uh now the cabinet level secretaries all have uh an impetus to save money and have better outcomes. But as I've been saying for 6 months
Uh Lidos is core. Business model is making government outcomes smarter and more efficient. So uh we we see that tide turning from Simply slash and burn to now constructive conversations about what better looks like and how more efficient looks like and what's smarter looks like and that's right in losses wheelhouse.
As far as the, uh, the the fourth vendor, um, we estimate that our share loss due to the fourth vendor so far is less than 1% of our volume. So uh, it's not my place to understand what's happening in their business but uh it's not affecting our Topline or bottom line of that business. Uh yeah, Chris anything to add to that. Uh, I think you nailed it, Tom.
Michelle, looks like we're coming up right on top of the hour so I think we have time for 1 more question. All right, just 1 moment, please.
Our last question is going to come from the line of Ken Herbert with RBC Capital markets. Your line is open. Please go ahead.
Yeah. Good morning Tom Christen Stuart thanks for squeezing the in here. Sure. Um maybe just to follow up Chris on a comment you made earlier in the call it sounds like you you took a a fairly aggressive or or disciplined approach to sort of costs in the first half of the year as things are normalizing. Here, it sounds like you're opening up the SP it a little bit as you really try and take be sure you can take advantage of of the opportunity set. Is it possible to maybe quantify how we should think about that first half second half cost Dynamic and and what that might imply to the margin Outlook in the second half in particular,
Well, I'm probably not going to get that specific before you can, but I would tell you, you're absolutely right. I mean, as soon as we saw the environment has shifted, um, we laid out a plan with Tom myself and and some members of our team of where we could dial back to preserve. Obviously, the core operations of the company. Uh, invest invest in our people, where appropriate, but, uh, be fiscally conservative and, and that added up to a substantial amount of savings, that we had lined aside on for the year we've delivered on, you know, 4 or 5 months of that savings profile today and now we see that, you know, it's time to go back to more normal operations, for most of that, given where we are in the environment and the opportunities that are coming forward. You know, it's it's tens of millions of dollars of incremental investment. Absolutely. That we're planning to outlay here in the second half and the idea is keep flooding our deaths, quite honestly. Um,
So we'll be smart and brooding around that, but we obviously want to turbocharge our AI adoption again. Those, uh, demo ready capabilities in Maritime and and, you know, in the defense system space and with software, uh, those are our priorities, uh, investing in our golden bolts. But, um, but I think it was just the right thing to do, given the uncertainty on the horizon. And again, it kind of also speaks to our ability to flex our business model when needed and uh, you know, we'll look to, you know, maintain some of those savings on certain areas that we didn't miss a beat on here going forward. So uh really
Excited about how the team responded to those Dynamics. Yeah. And just to foot stomp, that last Point, uh, really kudos to the team for how they reacted to the austerity measures we put in place early this year. There wasn't a peep of complaint about it. Everybody got it. In fact, I think there was a positive culturally within Lidos that everybody understood. This was a serious issue. We were dealing with to face into this environment and make sure lytos was seen as part of the solution, not the problem. So, uh, really was positive. Will now dial back, those austerity measures but as Chris says, we're not going to take our foot totally off the break, we're just going to release release release a little pressure.
This concludes our question and answer session, and I would like to hand the conference back to Stuart Davis for closing remarks.
I want to thank you, Michelle. Appreciate your help on this morning's call. And and obviously, thank all of those who were able to join us this morning for your interest in Los. Uh, we look forward to uh, updating you again soon. Have a great day.
Concludes today's conference call. Thank you for
It was a beautiful day.
Sunday dance.