The operator welcomes participants to the Leidos First Quarter 2024 Earnings Conference Call and introduces the CEO and CFO. The call will discuss forward-looking statements and will include GAAP and non-GAAP financial measures. The CEO reports a strong start for Leidos in 2024, an increase in full year guidance, and steps being taken to position the company for future success. The company has delivered impressive results in the first quarter.

Leidos' first quarter results show significant growth and success, with revenue increasing and record margins and EPS. The company's new organizational structure has unlocked value and they have begun their 2024 stock buyback program. With the passing of government appropriations, there is increased confidence in near-term growth prospects and the company is significantly increasing their 2024 guidance. The CEO is impressed with the company's performance over the past year and their ability to deliver for customers and shareholders. Leidos is a healthy business with strong profitability.

The speaker discusses the three key elements that Leidos is focusing on to achieve profitable growth: unlocking value and flawless execution in their new capabilities focused organization, investing in organic disruptive technologies, and developing a merit-based profit and growth strategy. The realignment of their organizational structure has already resulted in quick wins and the integration of their international customer touch points allows them to better serve global customers. The AUKUS trilateral security partnership presents a unique opportunity for Leidos to collaborate with Australia, the UK, and the US.

Leidos is uniquely positioned to serve the ambitions of AUKUS Pillar 2 through their commercial international segment and investment in organic disruptive technologies. The company's focus on innovation and cutting-edge technologies such as trusted mission AI, full-spectrum cyber, and secure rapid software, combined with their partnership program, allows them to deliver high-quality and secure outcomes for their customers. Leidos has a particular passion for remaining best-in-class in these technologies and has a robust IRAD pipeline and accelerators staffed with smart individuals to support their solutions. A specific example is their use of trusted mission AI in the intelligence community to address national security challenges, and their development of next-generation defensive cyber tools.

Leidos is using AI tools to automate the discovery of vulnerabilities and development of defenses, allowing for proactive deployment of defenses. They have successfully applied this technology to autonomous vessels for the US Navy and are now using it in software and IT solutions for their customers. Their partnerships with Sourcegraph and Moveworks have already shown significant productivity increases and automation of service requests. Leidos' focus on integrating trusted mission AI into their solutions sets them apart in meeting the growing demand for AI solutions.

The speaker highlights their company's leadership position in trusted mission AI and invites investors to an event at their headquarters. They also mention ongoing strategic conversations and principles guiding their upcoming strategy, which includes focusing on core strengths, repeatable business models, speed, and differentially investing in potential areas. The company will also prioritize their balance sheet and cash generation capacity. The speaker expresses confidence in the company's future success.

Chris Cage, the speaker, discusses the financial results for the first quarter and the company's promises for the full year. The company had a great first quarter, exceeding expectations in revenue, profit, and cash in every reporting segment. They are on track to have a strong year in terms of top and bottom line performance. Revenues were $3.98 billion, up 7.5% from the previous year, and adjusted EBITDA was $490 million, up 42% with a 290 basis point increase in margin. Non-GAAP net income and diluted EPS also saw significant growth. This was attributed to core operating performance and the company's ability to reinvest in the business. National security and digital revenues increased by 2% year-over-year.

The company experienced significant growth in 2023, driven by increased volumes on the Sentinel and DES programs. National security and digital non-GAAP operating income margin also increased due to milestone achievements, strong cost control, and excellent program execution. Health and Civil revenues and non-GAAP operating income margin saw a significant increase, primarily due to higher volumes in the managed health services portfolio. Commercial and international revenues also increased, driven by increased deliveries of security products and changes made in the SES business. Defense systems revenues increased, but non-GAAP operating margins declined. The company remains committed to improving margins for this segment.

In the first quarter, the company generated $63 million in cash flow from operating activities and $46 million in free cash flow. They also repurchased $170 million worth of shares and paid $53 million in dividends. Their cash and cash equivalents totaled $633 million and their debt was $4.7 billion. The company has a gross leverage ratio of 2.6 times and is raising their 2024 guidance for all metrics. They expect revenue between $16 billion and $16.4 billion, an adjusted EBITDA margin range of mid to high 11%, and a non-GAAP diluted EPS range of $8.40 to $8.80. They also anticipate operating cash flow of approximately $1.3 billion for the year. The company has a positive outlook on business development and expects their awards this year to support their growth objectives.

The paragraph discusses the performance of Health and Civil segment in the fourth quarter call and the potential for it to outperform due to increased medical examination volumes. However, the VBA has burned through some contracts sooner than planned and will have to recompete them early. The Defense Systems and Commercial and International segments saw better than anticipated revenue growth in the first quarter, but the full year revenue performance is expected to be relatively flat. The company is confident in its ability to deliver within these new ranges and is ready to take questions from investors.

Tom Bell, CEO of Leidos, discusses the company's strategy process and how it is driving growth and profitability in the near-term and long-term. He mentions the success of the managed healthcare business under Liz's leadership and the benefits of past investment decisions. Chris Cage adds that while the Health and Civil organization has been a standout, the company is also excited about other parts of its portfolio and investments in areas like AI that have broad applications.

The speaker discusses how their company is investing in AI and sees it as a key enabler for solving customer challenges. They do not break out AI as a separate target, but have seen success in improving quality and efficiency in their health and airport security businesses through the use of AI.

The company has successfully implemented AI in their unmanned and command and control systems, and they see it as a means to serve customer missions. They have raised their margin guidance for the year and expect strong performance across all areas of their business. They also anticipate further uplift in margin performance from certain parts of their portfolio. The company will continue to monitor their performance and the competitive landscape in the coming quarters.

The company has had a successful first quarter and is confident in its ability to continue this momentum throughout the year. The team has embraced a "promises made, promises kept" culture and is committed to performing well. The Health business had a standout performance, but the Civil segment also showed improvement. The team is focused on leveraging synergies and investing in innovation to propel their next growth strategy.

Tom Bell, CEO of Leidos, discussed the company's strong financial results and the impact of COVID on their business. He mentioned that investments made during the pandemic have allowed them to increase the number of veterans served by 27% in 2023, with volume continuing to increase in 2024. This has also allowed them to better serve rural and homebound veterans. The PACT Act volumes are growing, but this may put pressure on reaching the contract ceiling value for the Veterans Administration and could lead to an early recompete. However, the company is well positioned for this recompete.

The company is confident in their technology, capabilities, and team to continue serving veterans. They have provisioned for a slight decrease in profitability due to competitive dynamics and uncertainty around an upcoming RFP from the Veterans Administration. However, they believe they are well positioned to grow and provide excellent service to veterans. They have invested in increasing their ability to handle the volume and complexity of cases and see potential for even higher performance in the future. In terms of defense systems' margins, there was a slight improvement sequentially but a decrease compared to the previous year. The company is tracking milestones for improvement, particularly in the Dynetics business, and is pleased with their performance in the first quarter.

The company is focused on driving margins higher through the integration of Dynetics, improving program execution, and transitioning to the next phase of key programs. The CEO and CFO are confident in the company's ability to meet or exceed their full year commitments.

Rocco Barbero asks about margins and milestones in the coming quarters for national security and digital. Chris Cage and Tom Bell express confidence in the team's ability to continue strong program execution and exceed expectations. They also mention the potential for Health and Civil to continue exceeding margins in the second half of the year, and highlight a robust business development pipeline in the national security and digital space.

The company is focused on positioning themselves for future success in the marketplace, not just delivering results now. One area of focus is their hypersonics programs, which they are having conversations with customers about. They also have other areas of focus, such as IFPC Enduring Shield and Wide-field of View Tranche 2. The company is working to maintain their prowess in the market and serve the nation. The security products business still has room for improvement and the company is working on optimizing it.

The speaker discusses the company's decision to exit certain products and geographies and focus on those where they have technical differentiation and leadership positions. They mention their excitement for the business and upcoming plans for growth.

The company has a strong suite of port and borders equipment, but there are some areas that need to be evaluated and changed. The budget for capital expenditures is $190 million and may increase throughout the year, with a focus on unmanned capabilities. The team is also building a new facility in San Diego that will meet high security standards and open up new opportunities with customers.

Noah Poponak asks about Leidos' EBITDA margin and if it will continue to be over 12%. Tom Bell and Chris Cage discuss the company's potential and commitment to high-11s in 2024, with the goal of meeting or exceeding that in 2025. They emphasize the importance of making smart decisions and investing in areas with potential for growth.

Tom Bell, CEO of Leidos, discusses the company's growth in bid and proposal and changes they are making in that area. He explains that the company is focused on profitable growth and has a healthy backlog. Bell also mentions a robust pipeline of opportunities and hopes to announce new business in the latter half of the year. Analyst Noah Poponak asks about improving numbers in the funded backlog and book-to-bill ratio, to which Bell responds that they are not a priority and the focus is on profitable growth. The call concludes with a question from Cai von Rumohr about the company's successful medical exams.

The speaker, Chris Cage, mentions that the team has been doing great work serving veterans and has reached the ceiling on medical exams due to unexpected volumes. The VA has had to extend the deadline for a new RFP and the team expects it to be in place by the end of the fiscal year. They are in dialogue with the VA to ensure continued service for veterans. When asked about potential changes to the next RFP, the speaker says they have no visibility or thoughts on it yet.

Tom Bell discusses the company's confidence in their investments and technology to continue serving the nation and the Veterans Administration. They are not deterred by potential changes in rules and incentives, and are excited to continue serving in this way. Chris Cage adds that they have robust profits and are effectively serving veterans, with best-in-class customer service and reputation. Robert Spingarn then asks about the potential for AI to automate or improve efficiency in consulting work, given that a large portion of industry sales come from cost plus and time and materials contracts.

Tom Bell and Chris Cage of Leidos discuss the potential impact of AI on costs and billable hours in government contracts. They emphasize the importance of using AI as a tool to enhance productivity and create more value for customers, rather than just cutting costs. They also highlight the long-term benefits of implementing AI in their solutions, which will make them more competitive in future opportunities.

The company is confident in their growth potential and plans to continue investing in their capabilities. They have a significant portion of their revenue from fixed-price contracts and are not concerned about any negative impact from inflation. They are focused on driving efficiency and generating a good return for shareholders. There is only time for one more question from an analyst on the call.

Tom Bell, CEO of Leidos, discusses the somber tone of the Munich Security Conference and the increasing defense budgets in Europe. He also predicts a shift in defense spending from hardware to more integrated solutions and effectors, in which Leidos is well positioned to serve. He mentions the AUKUS Pillar 2 and how it aligns with Leidos' capabilities in seamless information sharing, AI, autonomy, advanced cyber, hypersonics, and electronic warfare.

Leidos is in a unique position to serve its UK customers due to the potential lowering of ITAR hurdles between the US and UK. This allows them to have more robust conversations about undersea, air defense, and electronic warfare capabilities. The company's Commercial and International segments are now aligned to better connect and serve customers. Leidos is also open to partnering with other companies in Europe to further expand their capabilities. In terms of domestic competition, the company is doing well in defending its current contracts and seeing growth.

Leidos is retooling their business to focus on capturing big opportunities and differentiating themselves from the competition. The team is strong and the pipeline is full of potential billion-dollar opportunities. Best value decisions are the trend and Leidos is focused on writing compelling proposals and understanding customer needs. They are confident in their position and are adding talent to continue succeeding. The call ends with closing remarks and thanks to participants.

This summary was generated with AI and may contain some inaccuracies.