Leidos Holdings, Inc. (LDOS) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Sheila Kahyaoglu with the Jefferies aerospace and defense equity research team, and thank you for joining the Jefferies Industrials Conference. We have Leidos on deck, and we have Roger Krone who's Chairman and CEO. Looking forward to chat with you, Roger, although virtually, not as good. But I'm going to hand it over to you for a few remarks.

Yes. Okay. Great. Thanks, Sheila, and we appreciate the opportunity to get back together, although I enjoy a lot more when we're together in New York. I know there's a lot of questions we want to get to. I just want to make a comment which I think puts it maybe a little bit all in perspective. We're a company of 42,000-plus employees. And of all the things that happened yesterday, which I know we're going to talk about, our earnings release and movement in the stock, one of our employees was involved in the shooting at the Pentagon. And as you may have read, one of the police officers at Pentagon police -- at the Pentagon metro station was actually killed, and our employee unfortunately was shot and hospitalized. And he is going to be okay. He was treated. I think he is released or will be released today. But I think it reminds us of kind of what the world's like. And frankly, from our perspective sort of short term and long term, as we will talk about where we are in our strategy, it's just, I think, good to acknowledge every day we've got people on the front line. And sometimes the front line is Afghanistan, which we may touch on with the drawdown there, but sometimes the front line is right here at home. So thanks, Sheila. Over to you.

Thanks, Roger. There's no doubt you are a people person. So thanks for those remarks. I remember that when we -- you first met me, you found me in the Starbucks line and you're like, "Hi, Sheila." And I was like kind of how does he even know who I am. So I always appreciate that about you. So thanks, and hopefully the employee is on his way to recovery.

Yes. I think it is very short term because you started your prepared remarks yesterday thinking about your strategy and how deliberate it's been. And your shares went down yesterday quite a bit, double digits on an unchanged organic guidance essentially, right? So I guess when we think about your outlook, where do you think people are misperceiving some of this risk?

Yes. It's always -- I was going to say it's my job to create the results and put the guidance out. It's sort of your job and the investors' to sort of figure out and try to assess what our equity is valued at. But -- and we have seen this year more volatility in the stock than we traditionally have. Those of you who follow our story know, in the first quarter, we had what's referred to as a short in the stock. I'm not sure that they own the stock today, but clearly, they're in our story. And they were active on social media yesterday, and that tends to accentuate some of the swings. When we look at it, we feel like we came out with -- we met expectations and we held guidance. As I read some of the print, there are people who have said, "Oh, you were a couple of pennies below consensus so maybe that's a miss." And because we didn't raise guidance for Gibbs & Cox, they say, "Oh, maybe that was a lower -- because we did do an MSA adjustment in the first quarter. And I made a comment on the call our Gibbs & Cox acquisition will contribute $100 million, if you round it up, and we just didn't think that was worthwhile to touch guidance for. So we feel like our story is on point, on message and consistent, which -- where we have been all year and frankly, entering into COVID. And we will now demonstrate that on the second half of the year. If anything, I think the move in the equity sort of derisked our story for the remainder of the year. Now I think we're also affected by what's going on around us. And so Booz Allen came out a couple of days ago. They didn't have a growth story. I know ManTech came out yesterday. And Kevin and his team talked about where they are in growth. And then I think Parsons came out this morning, and they may have actually touched guidance. And so we're -- we like to say we're differentiated from the sector, but we also know a lot of people curious in the portfolio. And when the sector moves, we tend to move with it. We are trying to differentiate ourselves and not necessarily move with the sector, but there is some of that as well. And then the last point I'll make, Sheila, and again, your investors understand this, we usually don't get a lot of volume given the number of shares outstanding. And when we start to see movement and the quants are involved and you have more algorithmic trading and the volume starts to come up, that creates both an opportunity for people to leave the stock in size but also to get back in the stock in size. And we're talking to many people today at your conference, Sheila. And some of the folks we have talked to had said, "Hey, it was great for me because I wanted to get an accumulative major position in the Leidos story, and the movement yesterday allowed me to move in at a very attractive price and at volume." So on any given day, the stock's going to go up and down. There's a lot of volatility in the market, especially with COVID and some of the supply chain issues. And I think we saw some rotation.

No -- let's talk about your organic growth. It grew 16% yesterday. Obviously, that's not a sustainable rate. Some of that is the health care business. But your backlog is also building nicely. You're at a record backlog, $32.6 billion, and have captured 1.3x book-to-bill over the last 12 months. How do we think about your visibility of growth from here?

Well, yes. First of all, we're thrilled with the success that we've had. And it means that there's very little that we have to go and get to meet our guidance. So if you look at the second half of the year, the backlog that we have, the win rate, the programs that we booked and programs that we have launched since the end of the actual calendar quarter, that make us confident. Then you have the NASA AEGIS program that we won that was protested. There's very little from a competitive standpoint that we have to do to make our numbers. So we're highly confident in where we are. And we're at 11%, if you COVID out and adjust last year. So our numbers are great, but a lot of people are showing nice growth because of COVID impacts last year. We're over 10%, again in the 11s, when you COVID adjust down the issues in civil and health care. So it's been a great story. As I said on the call, our last long-term guidance, which we know is a bit stale, from an investor conference 2 years ago was 5%. And I think I alluded to a little bit on the call we're going to have an Investor Day in October, and we have confidence that we will do better than the 5%. But it's all about having the right team, great relationships with customers, understand what their emerging needs are and then being able to competitively work your way through what we call the RFP process and to continue to win at the win rates that we've demonstrated literally over the past 14 quarters. And there's nothing about the way we operate that has changed that would make us less enthusiastic about growth. And I think I got a call -- one of the questions was: What about opportunity? What's your pipeline look like? What about submits? And the comment I made, I'll just reiterate for this group, is we will bid on more. We will have more submits dollars in '21 than we had in '20. And we are likely to be at or the same level of submits, the number of proposals that we write against potential business in '22. So there's no end to the opportunities to go after new business and to grow. The important thing for us is to understand the customer needs, right, high-quality proposals and then to follow through, through the protest and the adjudication of new orders.

And just speaking of the dollar bids submitted, I think you mentioned $49 billion, of which $35 billion is new business. Is this a typical new business submit rate? And kind of what wins are you -- what win rates are you seeing? NASA AEGIS is one you mentioned.

Yes. Actually, for the quarter, we probably have a little bit higher new business than recompete, which really speaks to growth opportunity. That tends to fluctuate quarter-to-quarter. So it was a good quarter for us. In third quarter, there may be a little bit more weight in recompetes with a couple of the programs that were going up. But overall, our win rates are solid and sustainable. And we tend to look at what we call recompete where we have -- we're the incumbent, we will win work. We talk about takeaways or -- where we're not the incumbent, there is an incumbent, and then we look at new work. And our numbers, we don't disclose. Our win rate numbers are actually better than our forecast across the board. And I'd like to say that if I was a batter in baseball and I was printing the numbers that we print, I would be in the hall of fame.

You can't hear me laughing because I was on mute, but that was cute. In terms of hiring, what are you seeing? We've heard a lot of people talk about difficulty hiring. I think you mentioned yesterday 4,500 new hires in the quarter and 6% sequential head count growth you have a number of contracts that are ramping, NGEN and MFLC. So maybe can you talk about how hiring on those contracts is progressing?

Yes. On NGEN, we are at or ahead of our hiring plan. On Military and Family Life Counseling, we're within a handful of percentage points of being where we need to be. And just so the audience understands, like on NGEN, which is a very, very large program where we will be hiring and have hired literally thousands of people, I know that creates a mental image of we've got to take every one of those persons through a solicitation interview, vetting a hiring process. But on many of these programs, we have the advantage of hiring a significant number of our employees from the incumbent, from the person who lost the contract for us. And on NGEN, probably 60% of that workforce will come to us in mass from the prior contractor. And that allows us to staff a large number of people very, very quickly. And maybe more importantly, when they come to work, literally on day 1, they're productive. They're charging direct to the contract. They don't have to go through an extended onboarding process. And so it accelerates the ramp, if you will, and the conversion of that contract, if you will, to applicable revenue which, for us, is often driven by labor, that becomes very, very quick. And so we have said we made a hire number, upwards of 10,000 people this year, some of those are coming by acquisition and some of them are coming through this process that we refer to as incumbent capture.

That's super helpful color. And then just turning to the defense business. That grew nicely in the quarter, too, up 12% organically. How are you thinking about opportunities there with Dynetics and maybe some offset from the Intel business?

Sheila, I didn't...