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    Leidos Holdings (LDOS)

    Q3 2023 Earnings Summary

    Reported on Oct 31, 2023 (Before Market Open)
    Pre-Earnings Price$91.79Last close (Oct 30, 2023)
    Post-Earnings Price$95.52Open (Oct 31, 2023)
    Price Change
    $3.73(+4.06%)

    What went well

    • Leidos raised its full-year guidance by $150 million, reflecting confidence in continued growth driven by a strong third-quarter performance.
    • The Health segment delivered exceptional performance, with operating margins reaching the high 18% range, surpassing previous expectations of mid-teens margins; the company aims to sustain this enhanced profitability level. ,
    • Positive outlook for the Security Enterprise Solutions (SES) business, with steady progress, new product introductions addressing changing customer needs, and investments positioning the company for future growth despite recent impairment charges.

    What went wrong

    • Potential weaker cash flow in Q4 due to government shutdown risks and early customer payments in Q3 could impact financial performance.
    • One-time benefits in Q3, such as a $14 million gain in the Health segment, may not recur, potentially leading to lower margins in future quarters.
    • Uncertainty in future Health segment revenue due to competition and ramp-downs in deployments, making future growth hard to predict.

    Q&A Summary

    1. Health Incentive Fees
      Q: Will health incentives continue contributing strongly?
      A: Management is excited about health incentive fees continuing to contribute in Q4 and into 2024, as the team excels in throughput, customer satisfaction, and timeliness under the PACT Act volume increase.

    2. DHMSM Contract Outlook
      Q: How will DHMSM impact future earnings?
      A: DHMSM is 91% deployed and on track to deliver to all DoD locations by year-end, but instead of tailing off, it's the first phase of a three-phase program, positioning us for continued work and follow-on opportunities, moderating any decline and holding at Q4 levels into 2024.

    3. DES and CHS-6 Contracts
      Q: What’s the outlook for DES and CHS-6 contracts?
      A: DES is performing as expected, with a major award of $274 million this quarter and another larger one imminent, acting as a growth catalyst for 2024. CHS-6, while not notable in 2023, is positioned to be a growth driver in 2024, with customers eager to utilize our capabilities.

    4. Organizational Restructuring
      Q: What's the impact of the organizational realignment?
      A: The new structure starts January 1, aiming for increased efficiency and effectiveness without significant costs; it's expected to unlock revenue and profit opportunities by challenging new leadership to create growth plans for each of the five businesses.

    5. Q4 Expectations and Shutdown Impact
      Q: Are Q4 earnings and cash flow facing risks?
      A: Aside from a $14 million one-time health benefit in Q3, nothing else unusual impacts expectations; however, we're cautious due to potential government shutdown risks affecting customer payments into Q4.

    6. SES Business Progress
      Q: Is the SES insourcing on track?
      A: Yes, we're on track to go live in Charleston by late Q1 or early Q2, having launched hiring and facility outfitting; SES improvements contributed to higher Civil margins this quarter.

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