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    Leidos Holdings Inc (LDOS)

    Q1 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$131.62Last close (Apr 29, 2024)
    Post-Earnings Price$139.09Open (Apr 30, 2024)
    Price Change
    $7.47(+5.68%)

    What went well

    • Leidos has a strong pipeline with ample opportunities well over a billion dollars, positioning the company for significant future growth and differentiation in competitions.
    • Investments in the Health and Civil segment are paying off, with increased volumes and complexity in PACT Act cases; Leidos is well-positioned to continue growing this business and delivering exceptional service to veterans.
    • Leidos is uniquely positioned to capitalize on increased defense spending in Europe, especially with capabilities aligned with AUKUS Pillar 2 priorities like AI, autonomy, advanced cyber, hypersonics, and electronic warfare, offering significant growth opportunities in international markets.

    What went wrong

    • The strong performance in the Health and Civil segment is heavily driven by increased volumes from the PACT Act, leading to pressures on reaching contract ceiling values and necessitating an early recompete for the contract with the Veterans Administration, introducing uncertainty and potential moderation in profitability in the second half of the year.
    • The Defense Systems segment experienced a decline in margins, down 170 basis points year-over-year, with a less robust start to the year than expected, which may impact overall profitability despite management's efforts to improve margins over time.
    • The company's funded backlog has been flat, and book-to-bill ratios have been lower compared to historical levels, indicating potential limitations in future growth opportunities and increasing competition in bidding for new contracts.

    Q&A Summary

    1. PACT Act Impact
      Q: How will PACT Act affect Health business profitability?
      A: PACT Act volumes are rapidly increasing, putting pressure on reaching the contract ceiling value with the Veterans Administration, necessitating an early recompete. Despite this, we are confident in our technology and team to compete effectively. We have provisioned for slight moderation in profitability in the second half due to competitive dynamics, but expect elevated activity to continue into 2025.

    2. Margin Outlook
      Q: Can margins improve beyond current guidance?
      A: While we have updated our full-year outlook to mid- to high 11% margins, we believe there is potential for further improvement. Some parts of our portfolio haven't reached their full potential, and we're driving them in that direction. We're not committing to specific levels beyond 2024, but we're eager to unlock the business's full potential.

    3. Defense Systems Growth
      Q: Will hypersonics drive Defense Systems growth?
      A: Hypersonics is one of several focus areas in our Defense Systems business. We're excited about our proven capabilities and are having robust conversations with customers about advancing the technology. We're also progressing well on programs like IFPC Enduring Shield and working to maintain our position in areas like wide field of view Tranche 2.

    4. AI Strategy
      Q: How does AI contribute to your business?
      A: We view Trusted Mission AI as a key enabler for unlocking superior value for our customers. While competitors may focus on selling AI labor, we integrate AI into solutions to solve difficult customer challenges. For example, AI deployment has improved quality on about $1 billion of health exams and enhanced efficiency in airport security and unmanned systems.

    5. Veterans Affairs Contract Recompete
      Q: When will VA contract recompete, and any risks?
      A: We expect the recompete process to play out over the next couple of quarters, culminating by the end of the government's fiscal year, with a new contract in place by our fourth quarter. While we don't yet know how the VA will structure the RFP, we feel confident in our position to compete and continue serving veterans effectively.

    6. Business Development Pipeline
      Q: How is your business development pipeline shaping up?
      A: Our pipeline is very exciting and robust across all businesses. We're refining it to aggressively pursue the right opportunities, focusing on profitable growth. In the latter half of this year, we anticipate significant new and takeaway business that we'll be able to announce in future calls.

    7. Capital Expenditure Plans
      Q: What are your CapEx plans for the year?
      A: We maintain our $190 million CapEx budget for the year, expecting it to ramp up. Key projects include completing a world-class facility in San Diego for classified work and investing in unmanned capabilities, demos, and tests.

    8. Security Products Optimization
      Q: How are you optimizing the security products business?
      A: We're refining our product offerings, exiting certain geographies and commoditized products to focus on areas with technical differentiation, like people screening and port and border equipment. We're excited about growing this business strategically as we move forward.

    9. Civil Segment Performance
      Q: What are trends in the Civil segment?
      A: The Civil segment had a solid first quarter with excellent programs. We see synergies across businesses in personnel and software capabilities and are building momentum, particularly in extending our FAA business capabilities to international customers.

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