Leidos Holdings, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• North Star 2030 Strategy: Leidos introduced North Star 2030, focusing on growth pillars aligned with customer needs, market profitability, and Leidos' differentiation. It aligns with the new administration's priorities in IT modernization, transformational war fighting capability, and increased privatization.
• Key Awards in Q4 2024: The VA awarded a 2-year multibillion-dollar award for medical disability examinations, Leidos won a $2.6 billion follow-on for integrated logistics software with TSA, received a $4.1 billion sole-source IDIQ for IFPC Enduring Shield Air Defense System, and secured a $670 million task order for hypersonic weapon development.
• Financial Performance: 2024 total revenue grew 7.9% to $16.66 billion, above the high end of prior guidance. Adjusted EBITDA was $2.15 billion, with an adjusted EBITDA margin of 12.9%.

Segment Performance

• National Security and digital: Revenue growth accelerated to 5.5%. Quarterly segment operating income margin slipped to 9.7%, with 10.2% for the year.
• Health and Civil: Revenues were up 16.4% from the prior year quarter, with a non-GAAP operating margin of 21.6%.
• Commercial and international: Revenues increased 12.3% year-over-year. Non-GAAP operating margin was 7.9%, down 80 basis points from the prior year quarter due to product mix and investments in growth.
• Defense Systems: Revenues increased 6.7%. Segment non-GAAP operating margin was 3.5%, including a $21 million write-off associated with an airborne surveillance asset.

Guidance

• 2025 Revenue: Expected between $16.9 billion and $17.3 billion, reflecting up to 4% growth from 2024.
• Adjusted EBITDA Margin: Guided in the mid- to high 12% range.
• EPS: Non-GAAP diluted EPS expected between $10.35 and $10.75, assuming an effective tax rate of 23.5% to 24%.
• Cash Flow: Anticipates operating cash flow of approximately $1.45 billion and free cash flow targeting ~$230 million in capital expenditures.

Risks

• Contracting Disruptions: Customers have faced temporary pauses in contracting vehicles due to adapting to the new administration's environment, though activity has resumed.
• Continuing Resolution Impact: The ongoing continuing resolution may suppress immediate order flow.

Question and Answer

Q: 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 DOGE efforts. I think there was a period where they could sort of try to pause federal spending is [probably] a couple of weeks ago. Just curious if you saw any disruption, I guess, kind of in Q1 so far? And if so, if that's kind of behind us or you're still keeping an eye on that.

A: Thanks for the question, Matt. Good to hear your voice. 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 day long, 2-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.

Q: So my question is about a focus on border security and the IRON DOME, 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, like this project?

A: Thanks, Mariana. Yes, 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. 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. All the capabilities that are requested in IRON DOME for America from space surveillance and understanding to counter effects for incoming cruise missiles and hypersonic weapons is 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' word, again, opportunities to satisfy that need quickly and affordably for our customers. 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. 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 present tremendous opportunities for Leidos growth in the future. We're focused on seeding that field with our ideas, the 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 and are eager to advance that conversation at pace. So very exciting times, indeed.

Q: You discussed several positive wins for the Dynetics Leidos business with IFPC Enduring Shield and common hypersonic glide body, I was wondering what is taking place with MACH-TB 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?

A: Yes. On MACH-TB 2.0, we're sub to Kratos and happy to do that. And yes, you're right. We were prime on 1.0. But there's ceiling available still to us on 1.0. And so we're not letting go of our opportunity to serve our customer there. And there's significant role work share that exists for us as a sub to Kratos on 2.0. So we know Kratos very well. 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.