Leidos Holdings, Inc. — 2024 Q1

This is Jasper Bibb on for Tobey. I think last call, you talked about the initial mid- to high 10% guidance range on margin as a base sustainably grow off. And then you raised the '24 guides significantly this quarter. So I guess looking forward, how are you thinking about progression on margins given the progress you've already made this year?

Yes, Jasper, thanks for that, right. Obviously, we're very pleased with the start to the year. And as in our prepared remarks, we indicated it wasn't just the Health and Civil business. It was really all of our teams got out of the gate strong.

Just pivoting off of that a little bit, I want to give a shout-out to the team for how they've embraced this whole concept of promises-made, promises-kept culture. So while we have a standout first quarter performance in our Health business, they are not the only business committed to continuing to perform through the year.

That makes sense. And then you mentioned the improvement in managed health programs for Health and Civil segment this quarter. I guess just curious what the trends were on the legacy Civil side of the segment as part of the growth in margins Leidos had driven in the first quarter.

Yes. The Civil part of the portfolio has some excellent programs in there. And as Leidos and the team are bringing that all together, it's more about the energy and the synergies that we see across those businesses on personnel and in software capabilities that can be extended to both sides of the equation. I wouldn't think there's any particular standouts in the Civil portfolio. It was a solid first quarter out of the gate.

But I can't let that question not go without a little bit of a foot stomp on the great performance we're having in the Health side of the business. We are continuing to invest in innovation there. And some of the innovations that Bert asked us about before that were built during the COVID crisis puts us in this position to do exams better for the VBA and some of the results that are behind the financial results are that Leidos investments have allowed us to increase the total number of veterans served by 27% in 2023.

Yes. So the PACT Act volumes are racing forward. We're in a unique position to liquidate that volume on behalf of the Veterans Administration and feel very good about that. But as Chris mentioned in his comments, that puts pressure on reaching the contract ceiling value for the Veterans Administration, and they may have to -- and they will have to recompete that contract early. However, we've got a great position for that recompete.

Yes, Sheila, I'd just add, I mean, we have invested. We'll continue to invest in increasing our ability to drive throughput and drive excellent service for the veterans. We've gotten the strongest signal yet from the customer that the volume of activity should remain elevated, and we see that continuing into 2025. And it's not just the number of cases, it's the complexity of those cases.

Yes. So I mean, a couple of things we're tracking, and Cindy, leading that business is all over this with her team. But as we said in our remarks, we're actually pleased with the way we performed out of the gates in the first quarter. We're ahead of pace.

Yes. And just to foot stomp that a little bit, Sheila. I mentioned -- as I foot-stomped an earlier comment about all the businesses keeping up with their commitments to Chris and I for their full year performance and the promises-made, promises-kept modus operandi, and I'm very happy to report that Cindy is amongst them, undeterred by a less robust start to the year than perhaps we might have hoped for, but very committed to the full year results, and she and her team are committed to meeting or exceeding those.

This is Rocco for Seth. On margins, milestone achievements supported the National Security and Digital margin in the quarter. Should we expect additional milestones in the coming quarters? Or should the margin rate there normalize? And then on Health and Civil, Q2 is expected to be as stronger as Q1, but should we think about the back half falling into the mid-teens on margins [ seen as strongest ] in the business, obviously, pending the recompete?

Yes, I'll start and Tom can jump on. Obviously, National Security and Digital, excellent program execution is what we expect from that team because they've consistently delivered it. And sometimes you're not able to anticipate that you'll knock it out of park on award fees the way they have continued to do so, but I wouldn't bet against them.

I would just say that my whole promises-made, promises-kept culture, never uninvites overperformance. And so overperformance is welcomed. Overperformance is understood as a goal we all look to achieve and I have every confidence, Roy and his team are going to work to overperform both in this year and the future. We haven't talked about it yet, but our business development pipeline is very exciting and very robust.

Great. And then should we expect hypersonics to drive Defense Systems growth this year or when the business is changing to limit growth?

Well, hypersonics is one of several areas that we're focused on in our Defense Systems business. And yes, we are very excited about the capabilities we've proven in our hypersonics programs. And in fact, this week, we're having very robust conversations with customers around where they want to go and how they want to take that technology forward.

We are very, very proud of Vicki and her team and the swift actions they've taken through last year and since last year. They're engaged, they're excited about the opportunities they see. And I'm very happy that they're not looking at that world through rose-colored glasses. They are being positively inclined pragmatists, looking at the market for what it is and looking at how we prosecute that market in the Leidos way to the best degree possible.

And I would just add, I mean, we're excited about getting our Charleston facility up and running. And the teams have been doing a good job there. Actually, the leadership team will be down there next week to lay eyes on it ourselves.

Yes, Matt, that's still our budget, and there's a little bit of reserve in there. And we ask the teams to be smart and disciplined even when we allocate them approvals. But you'll see a few things ramp up. We've got our San Diego facility that we're going to be proud of to get a brand-new facility for a lot of our classified work out in San Diego completed this summer, and the teams are also looking for interesting ways that we can get in front of the customer on unmanned capabilities, demos, tests, et cetera. So we expect that to ramp up a little bit, but we'll continue to manage that tightly.

Chris mentioned San Diego a little bit. I'll just foot-stomp the great job the team is doing there. We're building a facility that will be world-class in terms of security and up to the latest standards of our nation. And so we'll have facilities on the West Coast that are as good as any and better than most. And we're very excited about the conversations and the opportunities that will unlock for us with our customers and the opportunity, therefore, to serve them at the highest classification levels.

Well, no, we're not in the point where we're guiding to 2025 and beyond. But I remember last year, when we were wrapping up the year, we were talking about us being high-10s business and people were chastising me for suggesting we might be over 11%.

Well, mid- to high 11s. Tom, I just want to make sure the team doesn't run away from us here on their models. But no, your points are well made. I think that we have lines of business that haven't reached their full potential, and we're driving them in that direction.

And yes, we've put the right team in place to execute the vision for us being a growing business profitably, focused on profitable growth. And so the pipeline is being refined to go after aggressively the right business, not all business. You remember one of my sayings, not all business is good business. And for Leidos, people understand that message and our priming the pump of the pipeline accordingly. We've got a healthy backlog, as you rightly call out, I'm not a big fan of these quarterly book-to-bill ratios because they are a fool's mission.

Tom, good work on medical exams, terrific numbers. So you mentioned that you're approaching the ceiling on the medical exam. Can you tell us approximately when you might hit that ceiling? And can you give us any range of time frame in terms of when we might expect a new RFP?

Cai, this is Chris. Again, the team has done great work, and we're proud to serve our veterans, and it's been volumes that the customer didn't see coming when the original contracts were put in place. So the ceiling is structured differently. It's based upon an exam volume, and they've actually had to issue a justification authorization to extend that once already to give them time to run this competitive process.

Obviously, Cai, you'll appreciate the fact that our nation can afford the gap is critical capability for those who have served us. And so we are very appreciative that the Veterans Administration is working with alacrity around the whole of the system and how they keep serving our veterans adequately. And we're very much in dialogue with them to make sure that we're positioned to make sure our veterans continue to be served.

Got it. And so you've done way better than most of the other services business. Is there any risk or thought that because you're doing so well that the next bids might be structured so that there's not the same profit opportunity because obviously, I would assume, this has got to attract lots and lots of bidders. Or do you have any visibility at all or thought about how the VA might structure the next RFP?

I think the long and short answer to that, Cai, is no, we don't yet. They're still working through that themselves. But we feel very confident in the investments we've made and the facilitation that we've done, the technology we've deployed, the team we've assembled that we're in a very good place to compete and continue to serve our nation and the Veterans Administration.

Rob, what we're looking at with AI, and I mentioned it in my prepared remarks, is really becoming that conduit from commercial best practices and GenAI technologies into the government space. You'll appreciate as well as anybody the fact that the government space and the government systems have a whole bunch of idiosyncrasies and complications that people like Leidos and Leidos in particular, know very well.

Rob, it's a good question. It's a good insight. I think we take the view that you've got to play the long game here. I mean if we were worried about maximizing the dollar on the current book of cost-plus contracts, I think that'd be a little bit shortsighted.

Rob, on inflation, I get where you're going with that. And I mean there's -- I'd say there's pockets of that, but there's not a pervasive opportunity or concern in our current backlog. I mean a lot of it as we priced our backlog on multiyear jobs, even if it's fixed price, we built in some inflationary expectation.

Operator, it looks like we only have time for one more question.

Yes, it was a somber sobering affair. For those of you who haven't picked up the magazine that they published at the beginning, the title of the conference was lose-lose question mark. So that gives you a sense of the tone earlier this year. And I don't think that, that has become any more joyful.

Yes. So we're doing reasonably well in defending the work we have. Our recompetes and on-contract growth is good, and we are very happy with our performance there. The retooling in our business capture and growth areas is all about going after the big game and making sure we put ourselves in a position to robustly prosecute new opportunities for Leidos.

Yes, Jason, just quickly, I mean, I'd say that certainly, best value or decisions are the trend we continue to see. And I'm not seeing any Crazy Ivans and the competitive set is pretty well known and understood. We pay a lot of attention to that. Oftentimes, it just comes down to are you writing a compelling proposal, getting clarity of what your solution, and do you have the unparalleled customer understanding that you need to really hit the mark on the things that they're looking for that might not have jumped out in the RFI.

Thank you, operator, for your assistance on this morning's call, and thank you all for your time this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day.