Yahoo Finance Leidos Holdings, Inc. (NYSE:LDOS) Q1 2024 Earnings Call Transcript
Leidos Holdings, Inc. (NYSE:LDOS) Q1 2024 Earnings Call Transcript April 30, 2024
Leidos Holdings, Inc. beats earnings expectations. Reported EPS is $1.99, expectations were $1.65. Leidos Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to Leidos First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis from Investor Relations. Stuart, you may begin.
Stuart Davis: Thank you, operator, and good morning, everyone. I'd like to welcome you to our First Quarter Fiscal Year 2024 Earnings Conference Call. Joining me today are Tom Bell, our CEO; and Chris Cage, our Chief Financial Officer. Today's call is being webcast on the Investor Relations portion of our website, where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call. Turning to Slide 2 of the presentation, today's discussion contains forward-looking statements based on the environment as we currently see it and as such includes risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Finally, as shown on Slide 3, during the call, we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Tom Bell, who will begin on Slide 4.
Tom Bell: Thank you, Stuart, and good morning, everyone. It's very good to be with you again today, and I'm thrilled to report a very robust start for Leidos in 2024, a substantial raise to our full year guidance and some additional details around the purposeful steps we're taking to position Leidos for an awesome future. The Leidos team got out of the starting blocks impressively this year, addressing our customers' most vexing challenges with passion and pace and as a result, delivering an excellent quarter of top and bottom line results. First quarter revenue grew 7.5% year-over-year, all organically. First quarter adjusted EBITDA margin was 12.3%, a record for Leidos. And year-over-year non-GAAP EPS grew 56%. These results demonstrate that our new capability based organization is unlocking significant value across the company.
With good cash generation, as promised, we began our 2024 stock buyback program by repurchasing $150 million worth of shares on the open market during the quarter. You'll remember that during our last earnings call, I framed our initial 2024 guidance against the backdrop of a very good year for Leidos in 2023 and a very uncertain 2024 customer budget environment. Happily, since then, the House and Senate have passed appropriations for all the federal government. And now with funding in place, our customers have the resources and direction they need to confidently execute their missions. With that certainty in our customers' budget, the quick success of our organizational realignment and our team's strong start to the year, we have increased confidence in our near-term growth prospects.
As such, we are significantly increasing our 2024 guidance and now expect to far exceed our previous multiyear financial commitments. Chris will detail our new 2024 guidance later in the call. As I round out my first year at the helm of Leidos, I remain impressed with the capability of our people to deliver for our customers and shareholders. Over the last four quarters, revenue has grown 8% and non-GAAP EPS has grown 25%. We've delivered adjusted EBITDA margins of 11.5% and free cash flow conversion of 109%. And we've maintained rigorous investments in IRAD and business development. I'm very pleased that we've been able to refine the conversation about what's possible here at Leidos, especially around profitability. Leidos is indeed a healthy business.
So for the remainder of my prepared remarks, I'd like to share some additional details about the purposeful steps we are taking to position Leidos for an awesome future. We are achieving and propelling superior profitable growth by focusing on three key elements. First, continuing to unlock full value and flawless execution in our new capabilities focused organization. Second, increasing investment in distinct organic disruptive technologies. And third, developing a robust value creating merit based Leidos profit and growth strategy. Let me walk through each of these elements with you. First, we're very happy with the quick wins we're achieving from our capability based organizational realignment and we are anticipating that this move will continue to unlock significant value going forward.
For example, by consolidating our commercial and international business into a single segment for the first time, we're now better able to truly serve our global customers. In February, I had the opportunity to attend the Munich Security Conference. It was a sobering affair, which made abundantly clear that pervasive global threats are in fact growing. And our collective efforts to help our allies and partners are becoming even more crucial. To give you an idea of where and how the new Leidos can help, global battlefields of the future demand ever more cross domain interoperability and leading edge technical solutions. As we collaborate with our customers and allies around the world, we gain valuable insights into their interconnected issues across borders.
Our realignment, which integrates all our international customer touch points into one organization enables us to better correlate and quickly respond with a whole of Leidos solution to their critical emerging needs. Also, globally, the AUKUS, trilateral security partnership represents a unique opportunity for Leidos as Australia, the UK and the US seek to work even more closely together. The focus of AUKUS Pillar 2 is seamless information sharing, AI and autonomy, advanced cyber, hypersonics and electronic warfare. This list reads like a catalog of Leidos strength. We believe Leidos through our new commercial international segment is uniquely positioned to serve these ambitions like no other. Second, we will continue to accelerate investment in distinct organic disruptive technologies.
On my first earnings call, I highlighted technology innovation as a core of Leidos. Nearly a year into this role, I can confidently reaffirm that the technology prowess at Leidos is impressive, broad and deep. Continually sharpening our portfolio of cutting edge technologies, what I call golden bolts to lead turn the market will remain foundational to our North Star. At Leidos, innovation is everywhere, but we have a particular passion and focus on remaining best-in-class in three technologies trusted mission AI, full-spectrum cyber and secure rapid software. In each, we maintain a robust IRAD pipeline in what we call accelerators, staffed with incredibly smart people who work across the entire customer solution set. And we combine the resulting immense organic technical prowess with a best-in-class commercial partnership program to truly bring making smart smarter to life.
Let's talk about one of these accelerators. Trusted mission AI spans the breadth of our portfolio and is integral in practically all our customer solutions. Our trusted mission AI solutions work as a partner to humans in transforming the way we deliver high quality, rapid, and secure outcomes for our customers' most complex missions. For example, across the intelligence community, we have several large classified contracts where we're leveraging trusted mission AI to exploit vast amounts of data to address ever-changing national security challenges. In the cyber realm, our team of experts has spent the last three years developing the next generation of defensive cyber tools. These tools use AI to automate the discovery of new vulnerabilities and the development of novel defenses.
This unique solution allows us to proactively deploy defenses before attacks occur, crucial in foreseeing, averting and defeating cyber risks. In defense systems, trusted mission AI is the enabling technology that anchors all our autonomy work. We've built the first generation of autonomous vessels for the US Navy, several of which recently transited the Pacific twice as part of a manned unmanned task force, and we're now applying this proven trusted mission AI technology to the next generation of unmanned surface vessels. In software and IT, we're leveraging our exclusive relationships with key emerging technology providers to bring the best of the latest generation of generative AI to our customers. This enables us to uniquely position our customers to operate more efficiently, delivering real quantifiable impact.
Let me share a couple of examples here. Our partnership with Sourcegraph leverages their commercial cutting edge Gen AI coding assistant to transform the way we develop software. In just a few months, by combining our unparalleled government customer knowledge with their tool's power, we've proven productivity increases in software development of one-third. And we know these solutions are deployable even into the most secure customer environments. Our exclusive partnership with Moveworks gives us a differentiated ability to bring our customers the best in Gen AI-based IT service desk solutions. We've already deployed their technology within the Leidos IT environment and have completely automated processing of thousands of service requests. Our focus on integrating trusted mission AI into our customer solutions rather than just selling AI labor positions us uniquely to meet the growing demand for AI solutions across our customers.
I trust these examples begin to give you a sense of our leadership position in all our golden bolts, but especially trusted mission AI. But if you'd like to see more of our solutions in action and meet some of our wicked smart people, I invite you to an investors event we will be hosting here at our global headquarters in Reston on 12 June. Finally, I'd like to give you an update on the development of our strategy for Leidos' second decade of growth. As I mentioned during our last call, this is a year of deep, formally structured strategic conversations across the whole of the business. And while this effort will not be complete until early next year, I did want to share with you now some high level principles that are guiding our work. Principles of our upcoming strategy will be doubling down on our core strengths, seeking to exploit the power of repeatable business models, making speed a conscious competitive discriminator, differentially investing in the areas of greatest potential, building trusted mission AI into everything we do and uncovering unique opportunities to expand Leidos into logical, closely adjacent growth markets.
These guiding principles will enable us to stay true to what we do best while being quick to respond to the opportunities that are emerging at pace in our market. Also of note, importantly, as we think about our strategy, we will continue to view our balance sheet and cash generation capacity as key strategic assets. I remain committed to a disciplined capital management and deployment policy, continuing a focus on shareholder returns in the near term. In closing, we're off to a great start this fiscal year. We are committed to building on our successes and deliver smarter outcomes for our customers, shareholders and each other. As we continue to push the boundaries and challenge ourselves to think bigger, I am confident that 2024 will be Leidos' best year so far.
We'll see tremendous achievements and a crystallizing compelling growth strategy. With that, I'll pass the call to Chris to discuss our financial results for the first quarter and our financial promises to you for the full year. Chris?
Chris Cage: Thanks, Tom, and thanks to everyone for joining us today. The first quarter operating in our new organization was a great one, far surpassing our initial expectations. While Health and Civil was a standout, each segment's relentless focus on innovation and operational efficiency led to above planned performance in revenue, profit and cash in every reporting segment. Putting these results in the context of the full year, we are well on track to deliver an exceptional year of top and bottom line performance. Turning to the income statement on Slide 5. Revenues for the first quarter were $3.98 billion, up 7.5% year-over-year. With appropriations in place, our teams are working with their customers to execute on vital missions.
Strong top line growth in the first quarter enabled us to achieve record profitability. Adjusted EBITDA was $490 million for the quarter, up 42% year-over-year and adjusted EBITDA margin increased 290 basis points to 12.3%. Non-GAAP net income was $313 million and non-GAAP diluted EPS was $2.29, up 53% and 56% respectively. This explosives earnings growth was the result of core operating performance. The net impact of a slightly lower net interest expense and share count was wholly offset by a slightly higher tax rate compared to the prior year period. This bottom line performance not only boosted our cash flows, but it put us in a favorable position to continue reinvesting across the business to support the execution of our longer-term strategic objectives.
Turning to the segment drivers on Slide 6, national security and digital revenues increased 2% year-over-year. The largest growth catalysts were increased volumes on the Sentinel and DES programs, which more than offset the Focus Fox loss early in 2023. National security and digital non-GAAP operating income margin increased 120 basis points from the prior year quarter to 10.1% with some milestone achievements, strong cost control and excellent program execution. Health and Civil revenues increased 19% over the prior year quarter and non-GAAP operating income margin also came in at 19% up from 12.2% a year ago. The primary driver of revenue growth and increased profitability was higher volumes across our managed health services portfolio. We entered the year with tempered expectations around medical exam volumes, but we're seeing increased complexity on PACT Act cases and although we're investing heavily to drive throughput, the team did an amazing job at improving efficiency, optimizing resources and delivering exceptional service to the nation's active duty members, reservists and veterans.
Commercial and international revenues increased 4% and non-GAAP operating income margin was 8.3%, up 360 basis points compared to the prior year. We had increased deliveries of security products and we're seeing the impact of the changes we made in the SES business including a leaner cost structure, improved supply chain and rationalized product and geographic portfolio. Though our work is not done in fully optimizing the security products business, I'm proud of the team for their performance and recovery since this time last year. Finally, defense systems revenues increased 7% year-over-year with increased volumes in our Airborne ISR and Hypersonics businesses. Defense systems' non-GAAP operating margins of 8% declined 170 basis points over the prior year quarter, but were up 30 basis points sequentially and we remain committed to margin improvement for this segment for the full year.
Turning now to cash flow and the balance sheet on Slide 7. We generated $63 million of cash flow from operating activities and $46 million of free cash flow. DSO for the quarter was 62 days, unchanged from a year ago. In Q1, we repurchased a net of 170 million worth of shares including 150 million on the open market and paid 53 million in dividends. We ended the quarter with $633 million in cash and cash equivalents and $4.7 billion in debt. Our gross leverage ratio now sits at 2.6 times, comfortably below our three times target. On to the forward outlook on Slide 8. As we look ahead to the rest of the fiscal year 2024, we are poised to capitalize on the momentum we've been building. Based on our strong Q1 and improved outlook, we are raising our 2024 guidance for all metrics.
We now expect revenue between $16 billion and $16.4 billion, an increase of $300 million to the range. Our new adjusted EBITDA margin range is mid to high 11%, which would be record profitability for a full fiscal year. With an improving revenue and margin outlook, we're raising our non-GAAP diluted EPS by $0.90 to a new range of $8.40 to $8.80. And finally, we're raising our operating cash flow target by $200 million to approximately $1.3 billion for the year. Underpinning this updated guidance is a positive outlook on business development. In the first quarter, we booked a net of $3.7 billion, which translated to a book-to-bill of 0.9 times for the quarter and 1.1 times for a trailing 12 months. The quarterly bookings total excludes a multibillion dollar classified award that is currently under protest and a $630 million Defense Systems award received on April 1st, both of which are new work for Leidos.
We're seeing positive business development momentum and we expect our awards this year to support our growth objectives. Finally, let me give you some sector specific movements that color our full year guidance. On the fourth quarter call, we highlighted that Health and Civil had the potential to outperform if medical examination volumes remained high. Since then, volumes have actually increased given the complexity of PACT Act cases. The second quarter should see similar levels of performance or even a little better. However, as a result of the increased volumes, the VBA has burned through some of its contracts sooner than planned and will have to recompete them early. We are well positioned to continue our best-in-class service as a longstanding, trusted mission partner to the VA, but we are planning for performance in the Health and Civil segment to moderate in the back half of the year through the competitive process.
First quarter revenue growth in the Defense Systems and Commercial and International segments was more robust than anticipated. Although we see some potential for growth in both segments, we still see the full year revenue performance as relatively flat. In Commercial and International, some of the SES geographies and products we exited will begin to weigh on revenue and defense systems is still working to mature some of its developmental programs. Taken together with funding certainty, positive demand signals, and the performance seen across all four segments this quarter, we feel confident in our ability to deliver within these new ranges. With that, operator, we're ready to take some questions.
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