Leidos Holdings, Inc. (LDOS) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals strong financial performance, with increased margins across segments and raised guidance for EBITDA and EPS. The Q&A highlights strategic investments and a strong growth pipeline, although some management responses lack clarity. The reaffirmation of revenue guidance and increased profitability expectations, alongside strategic initiatives in defense and infrastructure, suggest a positive outlook. Despite concerns over AI and CapEx, the overall sentiment is positive, with potential upside from new contracts and programs.
Key Financial Performance
2025 Adjusted EBITDA Margin 14.1%, a year-over-year increase of 120 basis points. The increase was attributed to strong program execution and cost management.
Non-GAAP Diluted Earnings Per Share (EPS) $11.99 for the year, up 17% year-over-year. The growth was driven by consistently strong EBITDA and accretive capital deployment, including a 4.4% reduction in diluted share count.
Free Cash Flow $1.63 billion for the year, a 26% year-over-year increase. This was due to profitable growth and $150 million in cumulative Section 174 cash tax savings.
Q4 Revenue $4.2 billion, a year-over-year decrease of 3.6%. However, normalized for the extra week in Q4 2024 and the 6-week government shutdown in 2025, Q4 revenue would have grown approximately 4%.
Net Bookings $5.6 billion in Q4, delivering a book-to-bill ratio of 1.3x. This was consistent with the book-to-bill ratio in Q3 2025 and reflected strong alignment with administration priorities.
Year-over-Year Funded Backlog Up 15%, indicating strong momentum and alignment with strategic priorities.
2025 Revenue $17.2 billion, up 3.1% year-over-year. Growth was driven by robust demand in integrated air defense, intelligence community mission support, energy infrastructure, and full-spectrum cyber.
Adjusted EBITDA Margin for Q4 13.2%, up 160 basis points year-over-year. This was attributed to a more profitable business mix and excellent execution.
Commercial & International Segment Margins Increased by 180 basis points in Q4 and 230 basis points for the year, driven by strong execution and business mix in the U.K. and Australia, operational gains in SES, and increased use of AI in grid engineering execution.
Defense Systems Segment Margins Rose 680 basis points in Q4 and 160 basis points for the year, supported by accelerated production of small glide body munitions and IFPC Increment 2 systems.
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Operating Highlights
Passive Radar Systems: Awarded a 5-year $2.2 billion contract by the Air Force to deploy passive radar systems for base defense against aircraft and missiles. This validates years of investment in ALPS and MRADR systems.
Air Force Cloud One Next Architecture: Secured a 6-year $455 million contract to deliver secure, commercial-grade technology for the Department of War globally.
Missile Defense Agency's SHIELD program: Positioned on a $151 billion 10-year IDIQ program supporting Golden Dome and defense microelectronics modernization.
Energy Engineering Expansion: Acquired ENTRUST Solutions Group, a top energy engineering firm, to enhance competitiveness in the U.S. energy market.
Kudu Dynamics Acquisition: Acquired to enhance cyber capabilities, generating rapid growth and entry into new markets.
ENTRUST Solutions Group Acquisition: Acquisition aimed at scaling power engineering and design leadership in the U.S. energy market.
NorthStar 2030 Strategy: Realigned organization into 5 sectors to better execute growth strategy and align with administration priorities.
Increased Investments: Invested $312 million in IRAD and capital expenditures in 2025, with plans to triple capital expenditure investments to $350 million in 2026.
Leadership Changes: Appointed new CTO and enterprise transformation leader to drive innovation and operational efficiency.
NorthStar 2030 Strategy Execution: Focused on redefining national security capabilities by integrating cutting-edge hardware and software solutions.
Energy Growth Pillar: Divested non-core energy asset Varec and acquired ENTRUST to strengthen energy infrastructure capabilities.
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Risk or Challenges
Market Conditions: The company faced a 6-week U.S. government shutdown in 2025, which negatively impacted revenue growth by approximately 2 percentage points for the year and 7 percentage points for the fourth quarter.
Competitive Pressures: The company is increasing investments in innovation and technology to maintain competitiveness, including tripling capital expenditure investments to $350 million in 2026. This reflects the need to stay ahead in a competitive defense and technology market.
Regulatory Hurdles: The acquisition of ENTRUST Solutions Group is subject to regulatory approval, which could delay or complicate the transaction.
Economic Uncertainties: The company is exposed to potential economic uncertainties, as evidenced by the need to manage debt levels and leverage ratios following the $2.4 billion acquisition of ENTRUST Solutions Group.
Strategic Execution Risks: The company is undergoing significant organizational realignment and leadership changes to execute its NorthStar 2030 strategy. This includes integrating acquisitions like Kudu Dynamics and ENTRUST Solutions Group, which could pose challenges in maintaining operational efficiency and achieving strategic goals.
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Guidance & Outlook
Revenue Growth: For 2026, Leidos expects revenues between $17.5 billion and $17.9 billion, reflecting growth of up to 4% over 2025. Revenue growth is expected to build throughout the year, ending with sustained momentum approaching double digits.
Adjusted EBITDA Margin: Guidance for mid-13% adjusted EBITDA margin in 2026, normalizing some of the one-time benefits of 2025 and establishing a sustainable baseline.
Non-GAAP Diluted EPS: Expected to be between $12.05 and $12.45 for 2026, assuming interest expense of approximately $200 million and an effective tax rate of about 24%.
Operating Cash Flow: Projected to be $1.75 billion in 2026, despite a $90 million year-over-year headwind from Section 174 timing.
Capital Expenditures: Leidos plans to triple its capital expenditure investments in 2026 to $350 million, focusing on key national priority high-return projects, expanding production capacity, and upgrading classified facilities.
Segment Performance: - Intelligence and Digital: Mid- to high single-digit revenue growth at steady margins in 2026, with sustained mid-single-digit growth and margin improvement opportunities long-term.
- Health: Modestly lower revenue and margin in 2026, with growth expected beyond 2026 driven by rural and behavioral health opportunities.
- Homeland: Growth tracking corporate average in 2026, with stable margins and long-term margin expansion opportunities.
- Defense: Revenue growth above corporate range in 2026, with modest margin decline, but significant growth and margin expansion opportunities through 2030.
Strategic Investments: Leidos will continue to invest in its growth pillars, including cyber, energy infrastructure, and digital modernization. The company is also negotiating co-investment opportunities with the administration around critical warfighting and national needs.
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Shareholder Return Plan
Dividend Payments: In the fourth quarter, we paid $55 million in dividends.
Share Repurchase: In the fourth quarter, we repurchased $305 million worth of shares.
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Key Q&A
Q:Could you talk about the investment areas for additional CapEx and how it supports the ramp in the defense business?
A:The company is investing in co-development opportunities with the Department of War and other agencies like the Department of Transportation and FAA. Investments are also being made in the health business and growth pillars. Specific areas include maritime growth, Integrated Air Defense, and hypersonics.
Q:How should we think about growth patterns for the year, particularly the weaker start and stronger finish?
A:Growth is expected to be lower in the first half of the year and accelerate in the second half. Catalysts include FAA modernization, new program wins, and a robust business development pipeline. Approximately $7 billion in awards slipped from Q4 into Q1, contributing to the growth pattern.
Q:Can you elaborate on the book-to-bill ratio and expectations for award activity?
A:The company achieved a 1.3 book-to-bill ratio in Q3 and Q4, driven by investments in growth functions. A robust pipeline and backlog of $49 billion are expected to sustain this trend. The next 12-month pipeline is at its highest point, with 75% geared towards new business and takeaway.
Q:What are your expectations for the VA medical exam recompete and its profitability?
A:The company is proud of its execution in reducing the backlog of veterans awaiting exams by 60%. They expect an RFP in mid-year and are investing in rural health transformation and behavioral health exams. Despite potential work share reallocation, they aim to sustain profitability above 20% beyond 2026.
Q:Can you discuss the FY '26 growth guidance and margin conservatism?
A:Growth guidance includes potential acceleration in defense and FAA programs. Margin guidance factors in reduced volume in health but anticipates robust profitability. No one-time items are included in the guidance, and any outperformance this year could set a higher basis for next year.
Q:What is the update on product and defense tech areas, including programs of record?
A:Key programs include IFPC, hypersonics, ABADS, Wide Field of View in space, and maritime products like CDAR and ADC Mark V. The company is investing in payload and mission packages for unmanned surface vessels and expects growth in these areas.
Q:How are you approaching capital allocation, including M&A and buybacks?
A:The focus is on organic and inorganic investments aligned with the NorthStar 2030 strategy. While dividends will continue, no buybacks are included in the current guidance. The company remains open to shareholder-friendly capital deployment as opportunities arise.
Q:Are you concerned that AI could drive down prices for digital modernization programs?
A:The company views AI as a force multiplier rather than a threat. They are beta testing AI internally to improve efficiency and expect it to help customers shift budgets towards high-value mission outcomes.
Q:Does the guidance include task orders from the Golden Dome or Microelectronics IDIQs?
A:No, the guidance does not include IDIQs, only task orders when they are awarded. Any material ramp-up in these areas would be considered upside to the guidance.
Q:What is the progress in maritime programs, and when can we expect updates?
A:The Department of Navy's MUSV program is progressing, with Leidos focusing on payload and mission packages. While discussions are ongoing, firm plans from the Navy are still awaited.
Q:Can you sustain and expand the mid-13% EBITDA margin beyond '26?
A:Yes, opportunities for margin expansion exist in the Homeland and defense segments, as well as through the transformation office and the integration of ENTRUST, which is expected to be margin accretive.
Q:How do you view the step-up in CapEx and cash-on-cash returns?
A:The $350 million CapEx for '26 is situational and focused on scaling existing programs. The company aims to optimize working capital and does not see this level of CapEx as the new normal.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the timing and exact plans for the Department of Navy's MUSV program and the Golden Dome and Microelectronics IDIQ task orders. Additionally, details on the VA medical exam recompete terms and customer expectations were described as 'light,' indicating a lack of clarity.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI Leidos
AI machine
Air Force
Department War
Digital
ENTRUST
Golden Dome
IDIQs
IRAD
Intelligence
Leidos Air
Leidos solution
Leidosan
Stuart
access
alignment administration
bill ratio
capital expenditure
complexity
cyber pillar
defense tech
engineering
financials
firm
function
government shutdown
homeland
intelligence agency
leader
line NorthStar
matter
passion
power
reporting
scale
sector
step
track record
traction
week
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Leidos Holdings, Inc. (LDOS) Q4 2025 Earnings Call Transcript
Positive2-17
The earnings call reveals strong financial performance, with increased margins across segments and raised guidance for EBITDA and EPS. The Q&A highlights strategic investments and a strong growth pipeline, although some management responses lack clarity. The reaffirmation of revenue guidance and increased profitability expectations, alongside strategic initiatives in defense and infrastructure, suggest a positive outlook. Despite concerns over AI and CapEx, the overall sentiment is positive, with potential upside from new contracts and programs.
LDOS Slides
LDOS Report
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