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

Great. We're on. And I'm Doug Harned, Bernstein's Aerospace and Defense Analyst. I am really happy to have with us Roger Krone today, the Chairman and CEO of Leidos. It's great to have you back again and in person this time.

Doug, it's great to be back. And it's great to be with you again. We've been doing this, maybe it's our third decade, I think.

And doing it a while.

We've been doing a long time. Yes. That's right.

And so Roger, not only is he leading Leidos, which is the largest -- really the largest player in government, IT services in that space, but he and I go way back to many, many other parts of the business over the years.

Right, when long before you were in the job that you're in today and the job that I'm in...

Yes, exactly.

We could -- someday, we'll get together, we'll write the book.

It would be a..

No one will buy, but we'll have fun writing.

Yes, exactly. So with that start, Roger, maybe you could start off by taking us through how you're thinking of Leidos today in terms of your vision for the company and the overall strategy you're pursuing?

Yes. Well, of course, we're all coming out of COVID. We had some thoughts about where the business was going to be. We did our investor meeting last fall and thought we understood what the world was going to look like. And I've been talking to a lot of investors today. I was thinking defense would be flat. Civil and health would be up, therefore, a diverse portfolio. We thought interest rates would be a lot higher than they are. We thought we would have an infrastructure bill passed, maybe a build back better bill and tax rates would be up. And so I missed it almost across the board, except and we shouldn't recite that infrastructure in health care is actually up, but the defense spending is up, tax rates haven't changed. In fact, there have been some additional supplementals for Ukraine, all of which has created for Leidos, a really healthy business environment. And so when we -- and we look at our strategy on an annual basis, and we go back to the strengths of the company, which was we want to be the leader in the segment. We wanted to have size that drove scale for which we could use our scale to continue to invest in differentiated parts of our business, technology and processes. We want to continue to move quickly and to move with speed and agility. And then we want to make sure that everything we do is we do a lot of work for organizations like the national security agency, but we understand we're in this new world of both virtual and physical cyber. So making sure that we do everything we do with security in mind so that we can all operate reliably daily. I don't know what your devices are like, but I get alerts almost every day now about the cyber attack and things like that. And so that is pretty much stood the test of time. We're happy with the way we've diversified our portfolio. As Doug, you know, we've added some more product to our mix, not in a significant way, nothing to destroy our business model, being very asset-light, high cash generation, a focus on top line growth. And we said 5% to 6% in the fall, and we feel very confident in those numbers. And I was looking at some numbers, if you go back -- it's absolutely true. If you go back to 2014, which [indiscernible] when I started, our compound average growth rate both organic and inorganic, has been 14% top line. So that has really fueled the ability of the company to a lot of great things, to provide a lot of value to customers, and we fully expect to continue in that way.

Going through the pandemic in the government services arena, you had a lot of -- there were a lot of challenges in terms of just getting access to facilities. It was -- you have people out with COVID. And at the same time, I know you all did this, and I think a lot of others as well, you can change the way in which you work, too, in terms of people working remotely, things like that. Can you talk about what has changed for Leidos? First, how you got through the hard times in the pandemic? And are those over? And then also coming out of it, is there -- are there new opportunities here that can improve your performance?

Yes. We'll look back -- and I know you're talking to a lot of CEOs. I don't know how I got through COVID. I mean -- because it's CEO school, there's no section on pandemic, right. And it changed over time. So what we did -- because we're engineers and we have a lot of military people so we just did what everybody does. And we had a daily standup on COVID. And then things got a little better, we went to weekly. And we immediately went -- we emptied all of our buildings. We tripled the bandwidth of our virtual private network. We changed our telecommuting and our time and attendance policies. We did everything we possibly could to: A, make sure our employees got paid, right; B, make sure that they could do work; and C, make sure that we are creating value for customers. And once we got those 3 things right, a lot of the other things took care of themselves. We got some legislation to be able to pay for the standby workforce and a lot of that is history. What we saw, though, is, of course, our health care costs interesting enough, kind of almost went to 0 because nobody was going to the doctor and nobody was doing elective surgery. Nobody took vacation because they're on vacation kind of and so our PTO or paid time off went down. And we had to kind of rethink through our cost structure. We did have some disruptions in our business, our VA exam businesses. Our clinics were closed and that was a significant event for us in the second and third quarters of '20. But we learned a lot of lessons. By the way, I think middle management is really the heart of your company, and we had a lot of middle managers who probably were not all that adept at this mobile, flexible workforce. And I think we taught them during COVID that you could have your workforce work from anywhere in the country, most of the time and still get work done. So I think we broke through that layer. And now coming out of it, we think what are the lessons we've learned? What are the good things that we can hold on to? How have we changed as a company and as a workforce forever? So first, we have rewritten all of our HR policies. And we have a program we call it Leidos Life, but it is just a universal program where a talent development, career progression and how we take care of our employees are completely changed, as is telecommuting and telework. So we rewrote all of those policies in light of a new kind of a knowledge worker, one that doesn't care to come into work every day, but wants to come into work some days. So Mondays are pretty empty. Fridays are pretty empty. And that means we have too much real estate. So we have a plan to get rid of 25% as a good start on our real estate footprint. We've changed some of our benefits. We've added some mental health benefits. Financial planning, by the way, became a real need because if you don't know if you're going to go to work, if you don't know you're going to get paid and you're worried about money, your stress level goes up. And if you stress goes up, your mental health goes up. So we added those kind of benefits. But we held on the top line pretty much through COVID, and we picked up some strength in the bottom line. And we now want to have implemented programs that capture the goodness out of COVID through indirect costs, SG&A and overhead and build those into our permanent infrastructure, which should give us some more strength on the bottom line.

Well, on the bottom line, when you think about margins, it totally makes sense that if you can reduce your footprint, more remote work. There are plenty of ways that you can save cost. The thing that I would think about there, though, also is your competitors also are doing those sorts of things. Do you find that this will actually translate to better margins for Leidos? Or does it just in a sense get competed away? Everybody is doing the same thing so you've just changed the playing field?

Well, first of all, I'd like to think it might be better margins for our sector, okay. I think it also gives us a chance to differentiate. We are -- I know some competitors, who are still not back, okay. And that is not the position that we've taken. We want people to come into work. There are events when we write a proposal, we do a design review where we want everybody in the room because we're better at their creative process and idea generation, if we're all physically together. And I know other companies are not doing that. We have strongly encouraged our team to come into work often just not every day. If I told people in rest and you have to be at work 5 days a week, they literally could walk down the street and go to work for a competitor. But in fact, they wouldn't walk down the street because they're probably working from their study at home and they would just get a new VPN login and work for the competition. So we have to be mindful of that. But I think it actually can be a benefit to the industry and it gives us, if you will, another dimension, another attack surface for which to differentiate. And something we haven't talked a lot about is culture, and I worry that the companies who don't have people coming in are going to have trouble holding on to culture because culture at our company is really passed on at the water cooler, in the stories that are told about Bob Beyster, and how we were an employee-owned company and why people are so important to our formula. And if you don't see people, if you don't have social events, we have a roof that we can hold social events on, we have new employees. We have -- I did new employee orientation yesterday morning. We had like 250 college interns in the building, right. And that's kind of the strength of what we do. And we want to reach out and touch those students and talk to them about what we do and our mission and our values. And we want them to come back and want to be full-time hires. So I'd like to think it is -- it doesn't commoditize itself away in March.

Yes. Because I think this year, you're guiding to like 10.3% to 10.5% on an EBITDA basis. That's a little less than you did last year. I mean what -- when you look forward, is there the potential to bring those margins up? I mean how do you look at that trajectory, given what you've been through?

Well, the guide is -- think of it as the base Leidos engine. Last year, we had a couple of settlements, the MSA settlement in the first quarter, which caused our margin to be higher, but some of that was nonrecurring. So we guided to the 10.4-ish number as that's what we expect the base economic engine to generate. We still expect our law department to have recurring, nonrecurring favorable settlements. So there's a potential in any given year for us to be higher than that. I get a lot of questions about was there a significant margin expansion that you are planning at Leidos? And I like to back people away from that and say, we're not aspirational to get to the 12%, 13%. There are -- there have been companies in our sector who do that, but they do that on the backs of employee benefits, bid and proposal funds, research and development. We could pick up maybe up to another 50 basis points, probably more through mix than performance, which is bid -- the more significant double digits, some of the product work that we've added, can add to that and then sort of step away from some of the commoditized management contracts that we have where you get a very low fee. Some of the DOE work tends to be lower fee. And we could increase our margin with mix. But as an investor, you'll be able to follow shifts in mix like why we were interested in the SES business, the L3 business that many of you see at the airports is because that product business -- it's got a higher revenue when we sell and the service revenue is a nice margin, too. And it's not that we want to be a product company. We want a better balance in our portfolio just as we have a balance across customers.

Because -- also, you've talked in the past about your preference for fixed price programs. It still allows you when you get these cost savings to bring your margins up. But -- by the same token, we're in an inflationary environment now. So how do you think about inflation vis-a-vis your margin outlook?

Well, I still like -- and we're about half and half, what we call, flexibly priced or cost type contracts and then the other half being fixed price or time and materials. We think of it as a fixed rate. So -- and we would still prefer a fixed price contract. Let me talk about the former and then I'll talk about inflation is -- we like the fixed price contract because we bid on a cost basis and a cost profile, and we win. And then if we add process innovation, technology, if we replace a human being with a bot, then we can drive cost out and we get to retain kind of the fruits of that effort and that gives us a chance to do margin expansion. And our history has proven that. Okay. But now you have to worry about inflation. So first of all, our contracts tend to be about half labor and half material, right. For many of the factors, you try to bid what's called an EPA cause, an economic price adjustment cause against certain parts of your business, tied to certain commodity index. So we might bid a NASA ages where the server stacks have an escalator tied to a computer price index, right, which would give us some insulation against inflation. Labor, sometimes we have a producer price index that we EPA tied to labor. Sometimes, we have bid just a straight inflationary number. But you're right, our inflationary number would not have been 8. It would have been 3.1 or 3.2. And so we have some risk there. We have more risk if inflation stays at these levels for an extended period of time, and we won't "reprice labor" until next March. So we just did our general wage increase at -- we actually did raise it a little bit to get into the 3s. And we won't give a general wage increase to our team until March of next year. So the risk on labor is really what happens between now and then and what do we need to do for a general wage increase in March. And even at that point, I mean I can't imagine we would do an 8% raise across the board. But we would have to add more money to our general wage increase. Some of that we can tie in some of our fixed price contracts to adjustments and some of that might put pressure on margin. So no company, I think, can operate in 8%, 9%, 23-year record inflationary time without seeing the impact somewhere in the business. But now unlike if we were a steel mill and 65% of our value added was energy, then I would be a lot more concerned, but we're not. We just -- we're not subject to inflation in those parts of the economy that are, if you will, almost hyperinflation. It's not really our problem, but it's a concern it's something we're watching.

No. If you look at the defense side of your business, we've got the 2023 President's budget out there. One of the things that was striking to us is that it continues this path of 9.5% growth in RDT&E, research and development. It's about 6.1% growth in O&M, so much more procurement, not so much.

Right.

So when you look at that profile, what does that mean for your business?

Well, I don't want to get too far ahead, but it says we're pretty comfortable with the decisions that we've made. We do a lot of work at DARPA. We do a lot of contracted research and development over $1 billion. A lot of the work that we do on IT modernization and some of the mission work is coming out of the O&M budget. In fact, we're -- even in '22, we're chasing some of the plus up money in O&Ms to provide more mission capable to customers. As I started out this afternoon, I never -- I didn't see this coming. I mean I thought we would be kind of flat in real dollars. And I've seen some publications that have talked about a $100 million growth in the budget. By the time you put in perhaps an inflation supplemental and another Ukraine supplemental on top of...

Even $100 billion...

$100 billion. $860 billion for a defense budget for next year. Those numbers are -- I mean they're now being talked about publicly. And Doug, as we said, I've been doing this -- well, I've been doing this for 44 years. And I can't imagine a number that big, and that's without doubling down on things like F-35 and Columbia class and carriers, a lot of that is to fund OPTEMPO, some of the work that we're doing in the intel world, both because of Ukraine and the implications for the Pacific Rim that we have learned from Ukraine. So hypersonics, space, observation layers, surface navy, subsurface navy, a lot of defensive systems, missile defense, a lot of the areas that we have positioned Leidos to be able to take advantage of.

Is there -- related to Ukraine, is there any direct impact on Leidos related to the Russian Invasion?

Well, first of all, we're not a big producer of expendables and weapons. We make some small weapons for some [indiscernible] some other customers. We're not the Javelin producer. We're not the stinger producer. We don't make the switchblade or the M777. We are in the ISR business. We do a lot of work in the Intel community. The OPTEMPO there is significantly higher. So we're working overtime. We're spending more direct labor. We do have some ISR capability that is deployed in the area. I'd like to tell people, I don't think Leidos is a Ukraine play. If you want a story, that's probably not the story that would move you into our stock. But we're not seeing a detrimental effect to any of our businesses for what's going on in Ukraine. We're actually seeing -- I think, on the margin, increased opportunity and increased activity. We don't ever expect to have products like Javelin that we sell and is getting a supplemental. We are adding some capability to some of our assets to provide the U.S. with war situation awareness and what they do with that is up to the State Department. But not a huge plus up for us, but not a negative in any respect. But one thing I will mention, and we've had a great discussion here, there's been more discussion in the Continental Europe countries about FMF, direct commercial sales and foreign military sales about some of what we do to countries that we haven't talked to in 20 or 30 years. So the European defense budgets are going to go up, and we've actually opened some lines of communications that there may be some business opportunities in NATO, where we already do a significant amount of business and in some of the NATO aligned countries.

So I mean, right now, that's -- I don't -- as a percentage of your business, it's pretty small, right? But...

Well, okay, you asked the question. I'll answer the question that you're going to ask.

I mean, so where can this go?

Well, okay. So we break out what we call our international business, which is a little less than 10%. Okay, what does that mean? That is primarily Australia and the U.K. and a handful of other countries where the source of funds for that activity comes from a government other than the United States, right? What we don't break out is how much work we do outside the Continental United States that's funded by the United States, that's a significant number for us. And some of the NATO work, there's Paycom, European Command, there's a significant amount of work that we do. We used to do a lot in the Middle East and Afghanistan. We had Afghan CLS, which was not paid for by the Afghan government, was paid for by the U.S. Army. So we still have another significant part of our portfolio where we do work outside the Continental United States, but we use U.S. money. And that prepares us to do work for foreign governments. So we think there's an opportunity to grow our portfolio in international by being, by way, very, very selective. And that doesn't even count the work that we do in airports are what we call our SCS business, our passenger terminal work, our checked baggage, our carry-on baggage in ports and border network.

Well, when you move outside of defense and you look at the budget of civil budget, had a big infrastructure bill, build back better didn't happen, at least in its current -- in the proposed form, how does the budget set up for you on the civil side?

And I don't know whether you want to get into health as well because...

That would include, yes.

Yes. Okay. If we talk about civil and health, we didn't get build back better, but we're getting components of it. So technology of the border, which is what we are. We're not a wall company. We are -- our VACIS machine ports of entry both personal vehicles, trucks, trains and cargo, that business is very, very, very strong. The FAA business continues to be a terrific business for us. Airport modernization, air traffic control modernization, time-based flow management, some of the landing systems, something called [indiscernible] GPS. There is a significant amount of money moving into civil infrastructure. And then without getting kind of too far down this, but because of the Triad, DOE has money, which means that some of the nuclear facilities where we have worked both in active nuclear and in cleanup, which is Hanford, those are strong and well funded. And then in health care, which I think everyone knows is our highest margin and our highest growth business. The CMS budget is up. And one thing I think it's important to point out is if you take the federal government like $5.9 trillion, we're always talking about civil, where we're talking about defense and we talk about nondefense or civil, and then there's this big number called mandatory payments and then there's interest. And that's how the budget is made up. A lot of what we do, especially in the health work, are in the mandatory payment category. So the money that pays for a disability exam for a vet is in the mandatory payment category. So it didn't come out of the defense budget, right? And those numbers are whole number of multiples of the defense budget, and our VA exam business, frankly, our exam business across the board has been strong. We won a couple of new programs. We have over 1,000 non-health, think of it, mental health counselors for the active military and their family. We won the Reserve Health Readiness Program, where we do health care and health care exams for reserve, as we're getting ready to deploy and then our traditional program, which we talked a lot about, our electronic healthcare records program for the active military and it kind of goes on and on and on, but our health care business is just doing extremely well.

Well, all in, you've been running these big book-to-bills sort of year after year. I mean it looks like you should be able to do like double-digit top line growth, if I extrapolate those backlogs. Can you? I mean, is that what you think -- is that what you expect?

Well, okay. We have a long-term guide. And I stand by our 5% to 6% in the long-term guide. We have been fortunate to win more than double-digit book-to-bill. We do have this kind of a negative thing where sometimes customers debook, okay? So it brings that down a little bit. But we're also very circumspect about our ability to convert the backlog into revenue, but the math is clear. If I go back to my ECON 101 class, if you run a book-to-bill of 1.2 forever, eventually, you have to grow at 20%, right, if there's nothing that pulls it down. And unfortunately, in the federal government space, programs get canceled, budgets get rescinded. So that can happen. When the program gets rescinded, it will come out of our backlog, that would be a negative booking and you see it in our book-to-bill. But clearly, Doug, the potential is there to grow more than our long-term guide and what you hold me accountable for and all my shareholders hold me accountable for is to convert that backlog into revenue and grow faster than we guided in the fall. And we're hopeful to do that, but no, I'm not changing my long-term guidance.

Okay. All right. Well, if you go -- I'll switch gears here a little bit. So you bought Dynetics. That, to us, was a surprise. You're doing a product business much more than what seems to diverge some from the history of Leidos. Can you talk about, first, just Dynetics, in general? I mean I think most of the talk around is about the hypersonic program because hypersonic gets a lot of talk and you have the common hypersonic -- see how that program. But right now, that's a fairly small part of the revenues there. So maybe you could tell us a little bit about the rest of the business in addition to what the potential is from the hypersonic side?

Yes. Okay, great. Let me see if I can unpack this quickly. So we bought a company in Huntsville called Dynetics. We love the hypersonic business because we expect there will be growth in hypersonics. We subsequently bought a company called Spire that allowed us to get the thermal protection system, which is the protective coning that goes on the hypersonic glide body of $439 million add-on. So that was great. We liked the work they did. There's a set of programs called indirect fires protection capability that we call IFPC, which is a point defense a piece of equipment that allows you to put a mobile unit at an army base and protect against RAM, rockets and mortars and cruise missiles. So we have both the IFPC enduring, which hits the missile with a rocket. We have IFPC high-energy laser, which hits the rocket with a high-energy laser and then we have a high-power microwave program, which is more of a counter-UAV. So those are exciting programs. Of course, we won a lander contract Phase 0, which we executed on. We are likely to be on a team for the next portion of the lander program. We lost the, what we call, the base phase or the phase I to SpaceX, but we are likely to be back in the lander business. And then there's -- what I think has lost to a lot of people is Dynetics started as a service -- a pure services company doing systems engineering work, and that business is still alive and well. Today, half of the revenue, probably at Dynetics, you would classify as more service than product. So it fit culturally and it fit culturally with us well because they were employee-owned and we were employed. Now we've added 2 Dynetics, the company in Huntsville, all of our advanced design work that we had kind of distributed across the company. The traditional San Diego's campus point work, some of the work that we did in Boston, DARPA -- kind of our DARPA work. And so we've added a couple more legs to Dynetics. We have a very strong national security space business, where we've got an upcoming launch this spring. We've got a launch in the fall of a capability, not much I can talk about here. We bid on a follow-on program for LEO constellation, both as prime as a sensor provider, that could be $0.5 billion, $1 billion, and there's -- and it just kind of goes on and on, and then we're doing some work in maritime and undersea all part of the excitement at Dynetics. But the reason that we bought it was we want to solve critical missions for our customers and what we found is, without more product and hardware, we are missing out on a piece of their revenue and a piece of their mission that we didn't think we could fully address. And they don't think our mission is -- well, it's just a software mission or it's just a hardware, it's a TCPED mission, to asking collection processing, exploitation and distribution. And we want to be able to provide products and services across the entire value stream of the TCPED cycle. And Dynetics was a unique company at a unique time in its history, where they had grown so much they had, outstripped their capitalization. And they needed a company like us with balance sheet tools and processes, program management best practice to help them grow to the next level. And frankly, it's been a real success story.

When we expect -- when you look forward with respect to M&A, I mean, do you -- are you where you want to be? Would you envision more product-type business?

Well, okay. So I'm never where I want to be, right? And I don't think people in my jobs should ever be where they want to be. And we ought to always be thinking about what can we do next? How do we grow the company, how do we provide more value and capability for our customers, how do we create value in the company, how do we increase our market capitalization, how do we make Leidos more valuable to our owners tomorrow than we did yesterday? What I would say, and we have said on our earnings calls and various meetings is we don't need M&A to achieve scale. We're at a critical mass in almost everywhere we want to be. We have a nice R&D budget. We have a large capital investment budget. We have adequate money in marketing and being proposed. So we don't need it for that. What we do need, there are capabilities that we would like to add to the portfolio to fill out the portfolio and then there is always a time-to-market problem. I was asked, why did you buy L3's airport business? And I said, we looked at it, we could invest in CT at the checkpoint for your hand baggage and we could build an equivalent to provision, which is a millimeter wave radar, which detects any object you have from your skin out. When you walk through provision, that's what we're doing. But that's not an x-ray. That's a backscatter radar and we can look at any object. Like if you had a gun, we could see the gun. So we looked at -- yes, we could develop that, we could put our own R&D unit, and we could develop a product and then we have to go sell it and we have to fill out a marketplace and provision. And our CT at the checkpoint already had a global customer base. So literally, we are in 140 countries with our airport equipment. And we just came to the conclusion is, there isn't enough time and we don't have enough money to get to the same place. And so we were able to accelerate our capability and our market access with the L3 acquisition. And we would do a similar M&A if they provided that same kind of advantage. But we're not going to go to buy a competitor to do a roll up to achieve scale. We're already where we need to be. And we're also not really looking at adding a whole new market leg. We'd like to spend some more money in space. We're doing that internally. There are parts of our existing market we'd like to fill out, but it's not like some crazy thing like we want to be in electric automotive or electric helicopters or something. I mean, it's just not where we are. We love the portfolio that we've got today, but there's still a couple of gaps. So we will be in the M&A market, just don't look for us to do a big light dimmer deal anytime so.

Well, one of the things that's been happening over time is we've seen different commercial or almost semicommercial players start to come into this space. On one hand, you have companies like Palantir, but then you have like I have no idea what Carlyle is going to do with ManTech. But there's things going on here, but one of them is the Googles and the Amazons of the world. Now you talk about using AWS in a partnership but so does GDIT, so it's Palantir. I mean how do you view the new competitive environment?

Well, we worry about everything. I don't know whether a hyperscaler is a word, whether that's got a good connotation or bad connotation, but -- and we look at these in groups. We do look at Microsoft and Google and Amazon as one group book at Palantir and another. And then we look at like an Accenture, Deloitte & Touche in a different level. And then we look at the E&C companies that are kind of moving into our space, the KBRs and the Jacobs. And something we -- I'm paid to worry. So I worry about this every day. We deal, I think, with each group in a unique and maybe a different way. The hyperscalers we want to partner with. We are agnostic. We're not an AWS shop or a Google shop, we are all of the above. And we want to leverage their technology, by the way you might put Intel in that category. We want to bring the best to our customers. We want to share R&D projects. I mean we all know. If Google said, "Oh, I just want to own Leidos," they could do that and you wouldn't even miss the money off their balance sheet. So it is just a different offering. And we fully expect that Google will be bigger in government and AWS will continue. And our job is, we think, in that respect, to own the mission and the relationship with the customer and do that better because we're smaller, more intimate, we have more veterans, and we understand how that market works and that we can be a market access point for the hyperscaler. So that's how we deal with them. And we -- and it's been successful so far.

Isn't -- on that one, is it a possibility that one of those guys decide they do want to buy Leidos? They do want to buy ManTech, CACI, Booz Allen or I mean, is that something you think about, like if these guys could actually make a push to play against you and the...

Yes. Well, we have looked at it. And we've said -- I mean, there's only so much I can prepare for that if they could buy Booz Allen, they could buy Leidos. I'll just -- I think their culture is different than a Booz Allen or CACI even a ManTech. And I think what makes AWS and Google unique is that they're not Booz Allen, right? No, they could decide -- I mean, Google and Amazon, they could do whatever they want. I mean they have almost unlimited firepower. And if they decided -- I mean, they could buy the whole sector, right? They have that kind of capital, but they haven't because I don't think that's where their head is at. I think they want to be at a different place in the technology space. And I think if we can give them access to the government market, that may be a great place to build a order.

Well, it's funny -- this makes me think back in our past lives pretty you and me because we remember when people were looking at some of these government IT players a long time ago and didn't do it. And it was, in many ways, it may be very parallel with the big defense companies going, do I want to buy this -- is the culture does it work or not?

Doug, it's so interesting because 25 years ago, we might have been working on a study that said, do all the big A&D companies need a services company? And some of the big A&D companies created these services companies of which they have all divested by now. So we bought Lockheed's, Peraton bought Northrop's, somebody bought Raytheon, maybe there's momentum. And so the big A&Ds after trying to be 2 companies said we are better at A&D platforms and not so good at what Leidos does. And that had to do with cost structure and where people want to go to work and how you deal with an F-35 program versus a software design program. And the history may repeat itself. I know that Google bought Mandiant that seemed to make more sense than Google buying ManTech or Booz Allen. So I mean, we'll continue to watch the space. We're going to continue to really lean forward and to work with the hyperscalers. By the way, oftentimes, the customer determines like who the cloud provider is. We don't always pick AWS. One of our government agency that we're providing a digital transformation program to, we'll say and we want you need to use Azure. And so we have to be agnostic. We have to be able to do transformation to Azure. We actually think in kind of that market that as a service may be the next thing. And I don't know, is that the model that Google and Amazon want? Or is there, again, another role for an intermediary like us to take what they do and to wrap it in as a service capability. So like always, we have to be agile, we have to move fast. We have to stay ahead of the customer. And if we do that, we think we can provide value to the customers in excess of what a hyperscaler can do. And then you look at Accenture and Deloitte & Touche, and they clearly have a role in the marketplace, but they're not where we are on cost structure is Accenture has their rates, what you pay for on an hour basis at Accenture and D&T. And they just are not in our domain relative to cost structure, which is they take a different part of the market. And by the way, we try to create competitive mates with the consulting firms as well. And we do a lot of work with Accenture with John Goodman at Accenture Federal where we do over under bids. But it's a -- and Doug, I've talked about this when I ran the helicopter program, I had one major compete a year, maybe, I have one major compete a week at Leidos. And so you just get used to -- it's the difference between your playing baseball where you have a game every other day or almost every day and playing football where you play once a week. And at Leidos we have a game almost every day. And not everybody is good about building a machine that can write the proposals and compete the way companies in our space have to compete.

One thing that also relates to the sort of different position you're in, something you and I have talked about before, which is like things like JADC2, this sort of integrated concept.

We got almost to the end without saying JADC2.

Well, we've got some of the big primes here tomorrow. And they all see themselves as having a role in it. You're coming from a very different place here. And I would also argue, given your history with things like FCS you've got, a different perspective here. Like what -- I mean is this something that at Leidos you view as really a material opportunity? Or is it something where you're involved with different people and the customer discussions doesn't...

So the former -- we think it's a significant opportunity for us and for others. We don't -- there is no program of record called joint all-domain command and control. It doesn't exist, not in the forms. You can't find it. It is a concept. We kind of -- we call it all domain command and control, right, which is how do you get the Army, Navy, Air Force and Marines to talk to each other and to share information to benefit the warfighting capability. And that requires many, many bricks to make that wall. And we have 4 or 5 of those bricks today. We have the Army's advanced artillery command and control program called AFATDS. We've got some work that we do on what we call edge to the cloud and moving information around the battlefield. We have some communication programs for the Army and others. And we have a couple of Navy tactical data links and others. So we have pieces of the puzzle as does Northrop, as does Raytheon, IBCS and ABMS and some of these words. Yes, I've got experience in doing an integrated fires program as do some people on our team. And what we have done is we have taken what we think will become a ubiquitous all-domain command and control program. We've broken it into elements, and we're spending our IRAD to build out those elements. We're doing modeling and simulation, which I think will be really important as you prove the value of the interconnectiveness. We're developing some data links. We're putting some data links and some pods that you can put on to airplanes, so you can retrofit that command and control. And we're going after what we think are the building blocks and the elements of all domain command and control. And by the way, at the heart is going to be some agile software. And so we -- one of the leaders in the ability to scrum and do agile software, and we have expanded our software development facilities around the country and are able to write the code, which will be the connective tissue that will hold together this joint all-domain command and control. So -- and I may have said this already, we actually stood up what we call a division. So we're the company group operation and division, and we've hired a couple of people from the military to go run the division and the division is entitled to all-domain command and control. So the person who runs it, his name is Chan. His job is to go win a major part of what will come out of this phrase that we refer to as JADC2.

Well, we're about at time. So maybe to finish up, maybe you could tell us when you look forward, what are your 2 or 3 top priorities and any specific big challenges you see?

Yes. I think a good way for us to end at Leidos. We really are a people company, and we've been blessed -- we hired 12,000 people last year. We're at above 43,000 people now. And we talked about it on the earnings call, with the great resignation, we're doing a great job of attracting and hiring people and passing their culture on. What, I think, we all worry about is the knowledge worker of today is a lot more mobile and flexible than they certainly were in our day. And they change jobs faster than we're used to. So I think the challenge is around retention and to build a career path for our employees where they realize they can stay at Leidos and have a new job and part of their career development can happen within the same firm. So attrition is a significant challenge. And then maybe the last thing only, because we think about it is, I would love to see within certainly the Department of Defense, some protest reform. We're to the point now every program that we win over $1 billion gets protested. And so that's 99 days. And then if you get corrective action, you go to quarter of federal claims. So we're still seeing -- although we're seeing procurements starting to catch up with the CR and the omnibus and all that, we then run debt into the protest and what is called the stay where we get the stop working. the largest contract we've ever won the Defense Enclave Services that we won in first quarter is under protest. And I can't predict the outcome, but I suspect if we were to get the protest overturned, the claimant may well go to the court of federal claims and then you add another 6 months to the contract award. And that's very troublesome for us from planning from hiring, from doing transition and from the customer standpoint of getting on with digital transformation. So I worry about that as well.

Yes. Okay. Well, let's wrap it up here with thank you, Roger, very much. Really enjoyed it.

It was good to see. Good to catch up. All right. Thank you.