Leidos Holdings, Inc. (LDOS) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Record Quarter Performance

  Achieved a record adjusted EBITDA margin of 13.5% and adjusted diluted EPS 50% higher than last year.

• Share Repurchase and Guidance Raise

  Halfway through a commitment to repurchase $500 million worth of shares this year and raised full-year guidance.

• Strong Organic Growth and Cash Conversion

  Demonstrated industry-leading profitable growth and excellent job in converting earnings into cash.

• Strategic Progress and Investment in Technology

  Making meaningful progress in focus areas and investing in technologies like Trusted Mission AI and cybersecurity.

• Positive Outlook on Acquisitions

  Improved performance in previous acquisitions, notably Dynetics, and solid bookings in security products.

Pessimistic Highlights

• Challenges in Commercial & International Segment

  Faced $39 million of write-downs in the UK business due to changing requirements and scheduled slippages.

• Funding Challenges in Health & Civil Segment

  The VA's budget constraints are affecting the volume of disability claims, potentially impacting near-term case backlog.

Company Outlook

• Enhanced Financial Guidance for 2024

  Raised the lower end of revenue guidance to $16.1 billion to $16.4 billion, with adjusted EBITDA guidance increased to approximately 12%.

• Focus on Growth and Innovation

  A robust innovation fund is set up to accelerate investments across the business, aiming for sustainable profitable growth.

• Continued Investment in Strategic Areas

  Emphasizing investment in Trusted Mission AI, cybersecurity, and areas identified through strategic review for future growth.

Q & A Highlights

• Q: Can you discuss the moat around the managed healthcare business as you head into competition and recompete? (Mariana Perez Mora, Bank of America)

  A: The performance in managed healthcare is due to investments in technology and a passion to serve veterans. Awaiting the RFP for future contracts, but bullish on the opportunity to continue and increase this business. (Tom Bell)

• Q: What are the challenges in hiring and training talent for account managers and capture teams? (Mariana Perez Mora, Bank of America)

  A: There's a war for talent, but Leidos is becoming a destination of choice for the best talent due to its investment in people, processes, and tools. (Tom Bell)

• Q: Can you provide an update on portfolio pruning initiatives? (Matt Akers, Wells Fargo)

  A: The strategy is not about pruning but about investing differentially for differentiated results. No parts of the business are currently identified as not belonging in Leidos. (Tom Bell)

• Q: What should we watch for in upcoming recompetes? (Matt Akers, Wells Fargo)

  A: Focused on defending critical work, such as the VBA exam business, and looking forward to opportunities in hypersonics and other areas. (Chris Cage)

• Q: Can you dig into the expected moderation in National Security and Digital in the second half? (David Strauss, Barclays)

  A: The segment remains a core focus, with no indication of softening. Margins in this business are expected to be in the low double-digits, with a focus on revenue growth. (Tom Bell)

• Q: How are you thinking about working capital through the rest of the year? (David Strauss, Barclays)

  A: Focused on converting extra earnings into cash, with no major uses of working capital anticipated. (Chris Cage)

• Q: Could you walk us through the pipeline for each segment for '25 and '26? (Jeremy Jason, Citi)

  A: While specific segment breakdowns were not provided, the overall pipeline is robust, with $26 billion pending and a total qualified pipeline approaching $200 billion. (Chris Cage)

• Q: How do you think about the expected buyback and returning capital to shareholders? (Ken Herbert, RBC)

  A: Committed to prudent allocation of cash in a shareholder-friendly manner, with a focus on repurchasing $500 million worth of shares this year. (Tom Bell)

• Q: Can you walk me through the EBITDA margin and EPS outlook for the second half of the year? (Noah Poponak, Goldman Sachs)

  A: Guidance implies roughly 11% margins in the second half, with the primary reason being potential lower activity levels in the disability examination work. (Chris Cage)