Leidos Holdings, Inc. Q3 FY2026 earnings call

• North Star 2030 Strategy: Executing focused portfolio choices, including closing the SES joint venture with Analogic to create a scaled security market leader.
• Outcome-Based Offerings: Launching commercial solutions like MySTR (veteran health records) and Military OneSource support, leveraging cloud infrastructure for scalability.
• Cyber/AI Products: Parcata, an AI-powered automated cybersecurity platform, is advancing toward commercial availability later this year.
• Defense Tech Wins: Consistent wins in space sensing, munitions (Havoc Spear), and nuclear cruise missiles, resulting in a 2.0 YTD book-to-bill ratio.
• Energy Integration: Skywire and AI tools are scaling rapidly, targeting double-digit revenue growth and mid-to-high teens margins.
• VBA Recompete: Expecting existing contracts to extend through H1 2027 while awaiting final RFP; confident in positioning due to demonstrated performance metrics.

Revenue was $4.63 billion, up 4% total and 1% organically. Adjusted EBITDA was $644 million (13.9% margin). Key segment trends: Homeland led with 32% total growth (driven by air traffic management); Defense grew 3% YoY (impacted by prior year product purchases but showing strong momentum in production programs like IFPIC and munitions); Intel & Digital grew 1% YoY (strong intelligence demand offset by federal civilian IT reductions) with record margins; Health contracted significantly due to the VBA disability exam contract transition.

• FY 2026 Revenue Guidance: Raised, reflecting SES divestiture impacts ($200M less revenue expected in Q4).
• EPS Guidance: Non-GAAP diluted EPS midpoint raised by ~$0.37 on an adjusted basis, driven by SES exit benefits.
• Cash Flow: Operating cash flow guidance raised by $100 million due to SES exclusion and transaction cost adjustments.
• EBITDA: Maintained at mid-13s percentage range.
• Assumptions: Assumes government operates under continuing resolution through year-end; excludes significant EACs in Q4 compared to Q3.

• VBA Contract Uncertainty: Final RFP not yet issued; outcome depends on competitive process starting mid-2027.
• Procurement Delays: Some customer decisions have slid, tempering near-term growth momentum into Q4 and 2027.
• Cost-Plus Pressure: Indirect efficiencies may pressure growth rates on cost-plus contracts.
• Government Funding Risks: Reliance on continuing resolutions or budget approvals could impact execution timing.

Q: Analyst asked about leading-edge demand signals and OTA activity driving bookings given the 1.2x book-to-bill. / A: CEO noted procurement activity is accelerating as we head into the next fiscal year. Book-to-bill has crescendoed from 0.8 in Q1 to 1.2 in Q3. Total backlog reached $49.6B, with funded backlog up 22%. Leidos leads in OTAs with 212 contracts ($6.6B ceiling) and has $28B awaiting decision. The next 12-month pipeline is up 15%, with 40% in defense.

Q: Analyst asked about the investment arc for defense tech production capacity and when profitability will ramp. / A: CEO stated they invest judiciously as opportunities trigger, focusing on organic growth needs. Over a dozen programs are moving to rate production (e.g., IFPIC reaching full rate in 2027). With $10B in awards over 18 months and $14B visible pipeline, investments will show margin accretion starting in 2027 and improving over the decade.

Q: Analyst asked if Health segment margins in the high teens for Q4 represent a run rate into H1 2027. / A: CFO confirmed the high teens exit rate is a good model for H1 2027, assuming current contracts extend through mid-year. Confidence remains high in the VBA recompete due to Leidos' incumbent strength, veteran satisfaction track record, and the draft RFP's preference for proven performers. Specifics on post-compete margins will be clearer after February.

Q: Analyst asked why Intelligence & Digital achieved record margins despite modest digital contraction. / A: CEO highlighted excellent execution and cost management across the segment. Digital benefits from mature program efficiencies and "Mission Drivers" repeatable offerings. While favorable EACs helped Q3, the trajectory shows durable margin expansion potential as the team leverages technology to drive efficiencies in large federal IT programs.

Q: Analyst asked for bounds on VBA outcomes regarding revenue/margin scenarios and stock valuation implications. / A: CEO refused to bound specific financial outcomes due to the draft RFP status, noting final terms depend on April-May decisions. However, he argued that even zeroing out VBA, Leidos' sum-of-the-parts valuation suggests the stock is undervalued. CFO added that the bullish case includes gaining disproportionate work share from top-performing vendors, potentially increasing profitability beyond current levels.