Leidos Holdings, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Tom Bell noted six straight quarters of excellent financial performance and raised forward guidance for 2024. He discussed the Health & Civil segment's growth, including managed health services and positive developments with the VA.
• Business development was strong with net bookings of $8.1 billion, a book-to-bill ratio over 1.9x, and a backlog of $40.6 billion.
• Chris Cage highlighted third quarter revenues of $4.19 billion, up 7% year-over-year, adjusted EBITDA of $596 million, up 32% year-over-year, and adjusted EBITDA margin of 14.2%. Cash flow was strong with $656 million from operating activities and $633 million of free cash flow.

Segment Performance

• National Security and Digital: Revenues increased 1% year-over-year. Non-GAAP operating income margin was 10.5%, up 70 basis points from the prior year quarter.
• Health & Civil: Revenues increased 16% over the prior year quarter. Non-GAAP operating income margin came in at 24.2%, up from 16.5% a year ago.
• Commercial & International: Revenues increased 5%. Non-GAAP operating margins were 8.8%, their highest level this year.
• Defense Systems: Revenues increased 13% over the prior year quarter. Non-GAAP operating margins increased 280 basis points year-over-year to 10.2%.

Guidance

• Raised and narrowed revenue guidance to $16.35 billion to $16.45 billion, an increase of $150 million at the midpoint.
• Increased adjusted EBITDA guidance to the high 12% range.
• Raised and narrowed non-GAAP diluted EPS guidance to $9.80 to $10, an increase of $1.10 at the midpoint.
• Increased operating cash flow guidance by $50 million to approximately $1.35 billion for the year.

Risks

• Potential election-related disruptions in funding.
• Shifting budgets and priorities in some intelligence community customers affecting national security and digital growth.
• Modest recompete landscape for some contracts, though managed.

Question and Answer

Q: Peter Arment asks about color on $700M+ cyber takeaways.

A: Tom Bell talks about the National Security and Digital segment's cyber wins and capabilities, emphasizing the return on investment in cyber security and its role across Leidos.

Q: Sheila Kahyaoglu inquires about Health & Civil, specifically VA funding.

A: Tom Bell discusses the VA contract extension, upcoming two-year award, and innovation incentives in the VA recompete.

Q: Tobey Sommer asks about unclassified data collection in the BuckEye program.

A: Tom Bell states BuckEye is a strong business with fully utilized assets and expansions planned.

Q: Mariana Perez Mora asks about $29 billion of submitted bids in the pipeline.

A: Chris Cage notes nearly 70% of the 2025 portfolio is new business and takeaway.

Q: Cai von Rumohr asks about competition in Health & Civil's recompete.

A: Tom Bell and Chris Cage discuss maintaining competitive position and retaining margins post-recompete.

Q: Scott Mikus asks about CHS-6 program ramp-up.

A: Chris Cage and Tom Bell discuss CHS-6's ramp-up, early phases, and potential for future contribution.

Q: [Rocco] asks about national security and digital growth factors.

A: Chris Cage mentions shifting budgets and cleared personnel challenges, with pathways to accelerate growth.

Q: Ken Herbert asks about Q4 performance and 2025 outlook.

A: Chris Cage discusses Q4 considerations like vacation time and budget risks, with看好 margins in 2025.

Q: Louie DiPalma asks about PACT Act exam volume trends.

A: Chris Cage states no uptick expected in Q4, but sustained performance due to elevated pending claims.

Q: Josh Korn asks about share repurchases and capital deployment.

A: Tom Bell and Chris Cage discuss completing share repurchases and evaluating capital uses for shareholder value.