Leidos Holdings, Inc. ($LDOS)

Good afternoon, everyone. Welcome back to the Aerospace and Defense track at the 2026 JPMorgan Industrials Conference. I'm Seth Seifman, the A&D analyst, and we are very grateful to have with us Leidos, and we have CFO, Chris Cage, and we have Stuart Davis from Investor Relations, who I'm sure many of you know. And we'll do -- I think we'll do some Q&A here with Chris. And we'll ask for some questions from the audience as well. So feel free to raise your hands. And maybe we'll get started.

Well, great. So thanks for having us out. Great venue this year. A well attended conference. So you made it easy on us too in our neck of the woods. Thanks for that.

Cool. Yes. No, I like to change to Washington. So speaking of Washington, we're a little over a year into the administration and they've taken some different approaches -- in the headlines, but maybe some other changes as well. So what adaptations have you made in response to a changing landscape for federal IT? And what have the changes under the new administration meant for the business?

Yes. No doubt, it's been certainly an interesting 15 months or so under this administration. I think one of the first things they'd us do last year was ensure that we could communicate the value that we brought to our customers. It was really imperative that you understood. It's not just proposing on a particular contract, but really stepping back in and being able to articulate and demonstrate the value you brought to their mission. And I think that helps sharpen us. And that was an exercise that we went through last year. And now as we move forward, I think this administration, they're eager to get things done to make an impact. And to that end, they want to see contractors, partners that come to the table that demonstrate the capabilities that they are bringing to the table, not so much on what's on a power point but what's a live demonstration, what is a prototype product, what is something that's ready to be fielded. And so that's different, right? Where it does require you to ensure you are looking ahead to what the demand signal is and what their needs are and have that unparalleled customer understanding and position yourself to anticipate those needs. It did -- does require in certain cases, investing upfront a little bit more. Thankfully, Leidos is in a great position with the capacity to be able to do that and the demand signal from the team for that funding is robust, and we're able to make great choices the things that we want to lean into.

Okay. I'm going to ask -- I imagine if you've been having meetings today, you've probably gotten a lot of practice answering this question. But I wanted to ask about the proliferation of AI. It seems hard to have a conversation with anyone these days without talking about AI. But one of the concerns when people think about what that means and they think about federal services, how do you think about the impact? Do you see -- is this something that people are -- I think investors right now are just imagining what are -- what's the next thing that could be disrupted by AI? Or do you see a shifting landscape between, let's say, companies like Leidos, commercial software providers and the AI labs?

Yes. Definitely, the ecosystem continues to evolve. And I think this is where it's -- Leidos is in a unique position given our size and scale and the position that we hold on so many of our customers' critical programs that oftentimes we'll look to, to be the orchestrator of how do we bring AI to bear to impact the mission. So you're right, AI is certainly disruptive. It's bringing efficiencies to the table that were unforeseen before. But it's like -- there's more, a lot more to the story than just having AI drive efficiencies into the code writing process or even the user interface. When you think about getting deeply into the customer mission, you got to understand that you've got to be able to bring scale and security to the table. You've got to be able to -- actually, it brings the integration of these capabilities back into vogue, right, this integrator concept of how do you bring AI and connect it with the information, the mission outcomes, et cetera. So I think Leidos is certainly finding that there's there, there as it relates to AI being a tool that drives efficiency for us, but also generates a need for us to help our customers unlock the full value of that. To that end, we've again -- another area of investment as we've looked over the past year to ensure we deepened our partnership with leading AI labs and getting more of our Leidos employees access to these tools and capabilities, whether it be ChatGPT or Claude or Gemini, what have you, right? I mean we're spending the money to make sure that we've got the expertise across the board there and that we know the best way to unlock the full value of that for our customers. I don't think that conversation is going away anytime soon. But again, that's the way we're navigating the landscape today.

Okay. And I guess that's probably -- would it be safe to say that, that is most relevant in the intelligence and digital segment?

I'd say, certainly, the -- yes, most relevant there for sure, more on probably on the digital side. Although the intel side, I mean, there's still -- these tools and techniques, and I've seen some powerful ways that our teams are leveraging these AI to help the analysts in the op center understand how to make the most of the information that's available to them, the intelligence you can glean from that, the robustness of where you can dig deeper into your analysis and targeting what have you. But on the digital side, as it relates to being in the customer's IT environment and how do you use these tools and techniques to drive efficiencies into delivery model. Yes. That's our largest segment of the business, as you well know, intelligence and digital, and it kind of was the area, certainly on the digital side last year that was kind of most in the eye of DOGE, and we've come through that successfully. And now we're looking for that business to continue to get back on to a nice growth trajectory for us.

Right. And is that -- you mentioned that, I think the guidance for this year in intelligence and digital is mid- to high single digits. I think last year, the segment grew about 2%. Is that acceleration coming mainly on the digital side from decline to growth or are there other drivers? Kind of what gives you the confidence in that acceleration?

Yes. Well, I'd say most of the near-term growth that we feel confident in is more on the intelligence side. So we did win a couple of very nice large programs, middle-ish of last year that are ramping up and accelerating. And we see, again, that demand signal with our intelligence customers growing. Cyber is a capability that fits into that part of the business, and that's an area of growth and expansion with our Kudu Dynamics acquisition from last year and helping our customers with more full spectrum cyber capabilities. And obviously, what's going on today in Iran drives even more need for mission support activities to our intelligence customers. So in the near term, that's what we see as a catalyst for growth looking ahead to '26 as we move to the back half of the year, I mean the pipeline and the digital side of the business has filled back up and given us probably a little bit more [ muted ] the first half of '25 as customers were kind of reassessing how they are moving forward with larger procurements. Now we've seen that pace pick back up. And so we're -- we're seeing a lot of activity that could hopefully lead to some nice wins here in '26 to propel the digital side to growth as we look to '27 and beyond.

Okay. And so that growth rate for the whole business implies that the intelligence part of it is actually growing quite robustly?

Yes. That business this year probably is a double-digit grower. Modest growth, some growth in digital this year, but blending to that mid- to high single digits. Yes.

Yes. Excellent. Okay. Moving on to health, I mean I think the medical exam business has been a key driver of the company's financial performance in recent years. Maybe if you could talk about where that goes going forward, how you're thinking about the recompete there and the potential to sustain both the level of the business as well as the profitability?

Well, it's -- listen, it's been an excellent business for Leidos. It's been very well run by the team and delivering a critical mission in support of our veterans. We're proud to have done that work for decades now, right? So it's not new to us and just -- all we've seen over the last number of years is the demand signal to serve veterans has increased. And so Leidos plays an important role in that ecosystem. I would say, in '26, we've signaled that business coming off of two excellent years is modestly down on the top line and the margin but still a very important part of the portfolio. And we're looking ahead, have been looking ahead for the last year plus on the recompete that's on the horizon for us there. So that's -- sometime before the end of the year, the customer needs to reaward that program for a number of years. We stand ready to do that. I think we've certainly had our eye on continuing to advance the technology differentiation aspects of how we go about that mission. And I think the team has leaned into that, and we've got some compelling capabilities. But we also pride ourselves on the level of service that we perform, the throughput, the capacity that we've built, all things about how that program runs. So our expectation is we, of course, secure our position on the recompete. I do think there's more that we can do to help that particular customer on the end-to-end equation of how a life cycle of disability exams works, not just doing the examination, but there's more that we can bring to bear there. And then there's also disruptive technology that can help streamline when and where examinations are even needed. But all of that's part of the equation, things we think about all the time. We've got a great health business writ large. It's not just what we do with the VVA but clearly, looking ahead to opportunities on the reserve health readiness, recompete, life after Dim Sum, expanding our mission support in other parts of the VA and the HHS. So the team's got a robust set of opportunities that they're going after. But our focus is on behavioral and rural kind of expanding that platform into those clearly unmet mission needs for the customer.

Yes. So what was set aside for that in the reconciliation bill last year? And to what extent have you seen activity there in terms of RFPs? Or any indication that there might be some awards coming? And is there a familiarity in that customer community with the work that you've done at the VA?

Well, certainly, because VA will play a role too. I mean, so you're right. In the One Big Beautiful Bill, there was $50 billion identified to support rural care and just like other parts of the One Big Beautiful Bill, a little slow to see that flowing into contractual opportunities. We do think there's a there, there ultimately. But our focus immediately is the adjacencies within VA and expanding into how they support their veterans and beyond the VA, active duty service members and their dependents with care in the community network and things like that. So we've got a pipeline of things we're going after and rural clearly is an area that we've demonstrated we can reach the hard-to-reach veteran as it relates to disability examinations invested in a fleet of mobile clinics to have that impact. They're getting well utilized and continuing to look at what's the next step to make sure we're supporting our veteran community and other service members in those hard-to-reach communities. So I think time will tell. I think that, again, looking ahead over the next couple of years, I see this as a growth catalyst for us. It's probably not something that moves the needle for us on but we're playing the long game here on this particular growth vector.

And when you think about kind of the core VA work, do you see more companies showing up for the recompete? Or do you expect it to be mostly the folks who are there now?

Yes. I mean it's hard for me to product. I do think the VA understands they've got the right capacity in place to serve the mission need. And they've spent some time over the last few years, adding some capacity to the equation. You don't need to overcapacitize it. There's inefficiencies that get created for them and for the contractor community, right, too much of a good thing. So I think they've got the right capacity. And they -- this isn't one that is -- they have a number of factors that they look at to determine how do they want to meet this need and doing it with, like I said, timeliness, quality, customer satisfaction throughput. Those are all important criteria in making those determinations. So our expectation, just like anything that we go after, there's always competition. We've got to be on our A game, got to be sharp and I expect that we will.

Yes. Excellent. And so then when we look at kind of beyond this year and we think about the health business, and you think about the opportunity set out there, that's a segment that should be growing as we think about going into the last few years...

Our expectation is definitely that business is a growth business for us. It's a growth pillar. I do think that it's a very large business for us, a very profitable business and so the growth rate might be a little bit more modest there than other parts of the portfolio. But yes, my expectation sitting here today is '27 and beyond are growth years for that part of the portfolio.

Okay. Another one of the new segments, Homeland. And so a couple of topics to touch on there. First of all, just maybe most immediately, DHS still -- no appropriations for fiscal '26. Is that affecting the company in the near term?

Well, first of all, Seth, we've got to resegment every so often to keep you and Rocco on your toes. Getting to your question in hand on the DHS, obviously, we would love for there to be funding for that customer set. It's disappointing that there's not. But I would say, as it relates to broad impacts for Leidos, very modest. Of course, we feel for a couple of the programs that are impacted and some employees that aren't able to serve the mission, but it won't move the needle writ large for us as it relates our Q1 results. Now there's some award decision, things like that, that we'd love to see moving forward, and they're not right now. So we'll have to wait that out. And the hope is we get back to ordinary course of business here pretty soon.

Are some of those decisions related to scanning products? Or is that something that can move ahead separately with reconciliation funding?

Yes, not so much on the scanning products, CBPs funded and borders and port security equipment, some of those things are moving forward on the scanner side. Certainly, we're servicing our installed base and there's some potential funding available if they're buying new equipment. We're not seeing a lot of that in the airport side right now. But what we are doing is working with the TSA on piloting new modernized throughput experience. We think there's a lot of efficiencies that can be brought to bear there and some of that with Leidos equipment, but not necessarily just with Leidos equipment with other equipment in the ecosystem. But kind of certainly software and how much labor it really takes to provide a secure high throughput experience. And those are the kinds of things that we need to get through get the DHS back to business completely. And obviously, there's a new administrator coming on board there too, Secretary, I should say, that will ultimately help break some of those logjams.

Not to put you on the spot too much, but is that a business that you see as core to the portfolio long term?

The security detection side of the portfolio? I would say it's a business that we know well because we invented some of the technology that's on the ports and border side. We've augmented that. I want to make sure that business can be unlocked to see its full potential. I do think that there is some benefit that Leidos brings certainly on the software side because some of the core algorithm detection, the software capabilities and how we network that together and visualize the ecosystem of your security footprint for the customer, Leidos helps bring that secret sauce together. But the key is making sure it can reach its full potential and today, we think that's part of Leidos and excited to continue to help realize that vision.

Okay. I guess elsewhere in the Homeland business, FAA is a customer and I think a place where there's some opportunity and people traveling often get confronted with some of the challenges at the FAA. What's the opportunity there? What are the contracts specifically that Leidos is pursuing?

Well, I mean Leidos is an important partner and supplier to the FAA today. It has been for almost 50 years. It's just been a long-standing customer and some of the most critical air traffic management software systems, our Leidos-developed products. So we expect to be an important mission partner with them into the future. And so you think about this goal of modernizing the air traffic experience, and there's a lot to that. So far, the FAA has named a prime integrator to play a role to help them oversee and orchestrate this. That's not a role that Leidos was suited to play well. But where we do think we should play a role is on the new modern software capabilities. We've already demonstrated that we've got a lot of that, that we have been working on, and we have sold elements of that to other countries. We've got a demonstration center down here, downtown that we've had that customer in to showcase what Leidos has to offer. And so yes, we expect that ultimately, we will play a role in that of some kind. It's still a little bit unclear how they're going to go about procuring that. We've all been waiting. Again, one of these things where, just like with other aspects with all this funding, it's hard to predict exactly what form it will take, but we have taking every opportunity to make sure they understand how we can be a new, modern provider of state-of-the-art software but also somebody that has intimate knowledge of the FAA and the mission and take that -- and understand the safety and security and everything that goes along with software that is this critical. So I do expect that it will be something here in the next quarter or two that we'll have line of sight on and clarity. I do think we need to get after it. This administration wants to clearly put some points on the board with some wins, and this would be one of the big areas that they're focused on. So to get to done, you've got to get the contract let, and therefore, we're eager to get to that point.

Yes. It was just something people would certainly notice. The energy business is something that is relatively, as an A&D analyst, something that been learning a little bit more about over the past few months since you announced the ENTRUST acquisition. I guess that's up to, I guess, about $1.3 billion or so this year for the energy business. Maybe talk about what drives growth in your energy business and why you see it as a good place for Leidos to be allocating capital?

Absolutely. Well, first of all, the $1.3 billion just for clarity is a pro forma with ENTRUST closed on a full year basis, right? So that won't be the results this year, but that is the trajectory that our combined business will be on. And so we're very excited about it. We've got a business that Leidos has grown internally over the last decade or so, and the team has done a really nice job of serving an important customer need. And this is one where you've got to earn that customer trust doing work for publicly traded utilities. There is a customer relationship aspect to that, then you've got to earn your way in. And once you do, you're a trusted provider to them. And what they've seen is the demand signal continues to ratchet up, right? So whether it's just the ordinary course development and expansion infrastructure projects, whether it's responding to natural disasters, whether it's hardening and modernizing the grid, securing power lines underground in California because wildfire risk or now the explosion of new energy demand coming from data centers, there's a robust appetite for engineering projects to help them do all of that, to bring power online, to do it in a way that's reliable, secure, predictable, et cetera. And we've been serving that mission interest, it helps us expand our reach, it broadens our geographical footprint, gets us access to even more blue-chip utility customers. It brings us access to the gas market, which we weren't in. We did not previously serve gas utilities. So there's transmission and distribution aspects to supporting them as well. So similar capabilities for a different client set. And so all of that together just says this is an area we really like, and we like it because low capital intensity, right? So this is a business that doesn't take a tremendous amount of investment. It takes playing the long game and earning your way in and then being able to do that efficiently. And what makes it a little bit unique for us is since this business has grown up out of an A&D contractor for the large part that we have had a robust amount of investment that we've been able to put behind our technology and AI tools, et cetera, for deployment into the federal government. It was easy to find applications of those tools and techniques to this customer set in this market. So it has the benefit of that technology backing that we're now able to leverage into the ENTRUST accounts and profile. So I think it's going to be an excellent marriage. I'm excited about getting to close. That data is still uncertain, but very near term, I would expect that hopefully within the next 30 days. And yes, we got an integration plan ready to go, and I expect this to be a nice tailwind on our growth story and our margin story in the years ahead.

And that business has been growing relatively quickly in recent years. How fast has it been growing?

It's been a double-digit grower for us for the last several years inside Leidos. So definitely happy with that. I know we sold a small piece of it last year called Varec, and we're really trying to hone that part of the portfolio to the core piece of where we want to take this business, but it's really done well for us over the last several years. And like I said, we've only seen the customer demand signals continue to ratchet up.

Do you see it as a place that's ripe for incremental M&A in the future?

I think that will depend. I certainly would say our near-term focus in the next 12 months, let's call it, is integrate this business well, get it operating seamlessly together, delight our current customers, leverage technology. And then you got to stand back and maybe understand geographically, are there areas in the market that you're still not in, where you need to be, especially as you look at where some of the new capacity will be coming online. So through that lens, we'll pay attention to it, but I wouldn't say there's any near-term expectation that we need to add more to what we've got.

When you look at the competitive landscape in this business, are you the biggest player or one of the biggest players?

Yes, one of the biggest players. I mean, when we did this pro forma, we were saying, hey, top 3, top 4 in the transition distribution market. So clearly, have been moving up the ranks here. There's a few large, but I'd say it from a pure engineering perspective, we're getting to be to the top of the list. Some of the larger providers also do construction projects, and that's not in Leidos' bailiwick. So obviously, a material player and certainly somebody that continues to command our customers' respect and attention.

Okay. I want to make sure we have time to get to the Defense segment since that's something that I would imagine should be the fastest-growing segment within the company over the next few years?

Yes, save the best for last, Seth. So very excited about the defense piece of the business. And I know that you've been on this journey with us for a while. You've been down, and you've seen Huntsville in its earlier days, and I was just down there a couple of weeks ago, and it's night and day from what you saw, too, as far as furthering our capability, building out our production lines, really ratcheting up things for more high-volume output. So very excited about the defense business. I mean we put more together with that as we entered into 2026. We combined our Defense Systems business with other parts of our defense portfolio to kind of have a holistic customer concentration and access to that to the Department of War, thinking about some of the stuff we do on the software and the logistics side as it fits in with some of the product ecosystem. And we've got a number of things now that are already accelerating or on the cusp of accelerating our portfolio.

Yes, maybe we can talk about some of those things. And I guess, first of all, if we take defense, I think it's about a $4-ish billion segment. And then so should we think about something in the [ 2s ] is kind of the -- what you might think of as like products with potentially fast growth?

Yes, that's the round numbers, [ 2 and growing ]. And that will be the faster growth, although there are still plenty of other important opportunities on some of the more services-oriented stuff. But yes, the product side of the business. And again, more of these have been several years in the maturation process, getting to the point where quantities are going up and profitability should therefore go up because we've kind of passed the early phases where you've had to prove through the development phase that you can get something to the capability that you needed. I think we've matured that in most of the things that we're manufacturing. Now there will always be some new emerging capabilities that we're focused on next but excited about that.

Yes. And what would you highlight as kind of the top two or three growth drivers within that portion of defense?

Yes. So I mean, the two most significant programs in the near term, one would be our indirect fire protection program. We were able to secure a $4 billion IDIQ on that last year. Now we've seen the Army customer order a number of lots underneath that IDIQ. Defense of Guam, Korea now fiscal year '25, talking about fiscal year '26. So the order quantities are ratcheting up and we've expanded our capacity to meet those quantities. So that's program #1. And late last year, we won a program called ABADs, Air-base Air-Defense, and this is our passive radar detection system. So those products, a couple of different product lines there that we're excited about scaling up the manufacturing of those units to support our Air Force customer and again, these are some capabilities that you can imagine in a future world with Golden Dome, like how do you have the architecture to protect the United States. These are some of the capabilities that we would point to. So those are some things that are ratcheting up there. We've obviously got aspirations in the maritime arenas in space. Those are two of our -- that's part of our growth pillars. Space in particular right now, it's smaller, but it's got a lot of growth potential there as we've positioned ourselves on the missile warning, missile track satellite payload detection capability there and have been a player on the first few tranches and look for other ways to proliferate that capability with our SDA and the space force writ large.

So you guys have been a payload provider for Tracking Layer. I forget, have you disclosed who -- which of the primes that you work with?

I don't know that we have consistently -- okay, Northrop, SpaceX on Tranche 0, Sierra Space. So we've had a variety of providers, so that the FDA has seen us in action on a couple of different fronts here. And you're right, being the payload providers, the place that we want to be. And again, that's an area that we've expanded our capacity, both in San Diego and in Huntsville to build large amount of quantities there.

Right. And is that in preparation for, I guess, there's -- what SDA is doing in Tracking Layer, there's Golden Dome where there was a bunch of separate money directed at missile warning, missile tracking satellites. Do you see those efforts emerging at some point since they're kind of headed in the same goal?

Yes, it seems inevitable that they'd collide at some point and get wrapped with that overall umbrella. I mean they're -- for the same intention of missile warning, missile track, defending our nation against hypersonic threats. That's -- the space layer has got to be part of the Golden Dome architecture. And so ultimately, I would expect that those will converge and that just brings a bigger tailwind and probably more urgency to move at pace would be my expectation once we really start to see the Golden Dome money flowing with intention on the architecture that they're working towards.

Yes. Okay. And on Maritime, what made your focus on maritime as a growth pillar? That's a market that's fairly nascent. I guess you've got a few different players looking to grow in that market. So how do you think about your competitive advantage?

Yes. I mean Maritime, it's interesting because I think many people would say, I mean, it's obvious that Navy in the future fight needs more capability, can't afford to have all manned platforms, autonomies got to have a role to play. Leidos has long had a maritime business, long had an autonomy capability, have demonstrated that robustly to the Navy. And so that's exciting. So we've got proven chops there. And then a few years ago, actually almost 5 years ago now, we acquired a company called Gibbs and Cox. So we did make an inorganic move into this arena to acquire naval architecture and engineering capability. So as a leading designer, so we've got the chops, the design. We've got the chops for the autonomy. And increasingly now, the other secret sauce that I would say we bring to the party is it's the payload. So you think about the autonomous mission, okay, it's not just having a boat that can be unmanned. It's like, well, what capability can you deliver? And so increasingly, you're seeing the customer interest level peaked as you're talking about the payloads, and that's back to what Leidos can bring out of our defense business, back to what Leidos can bring out of our cyber capabilities. There's real mission impact that we can have on the payload side of that equation, too. So we think there'll be ultimately a lot of dollars flowing here, and we think we're well positioned in the portfolio to take advantage of that.

Okay. Maybe we're out of time here. But maybe just as a last one, I wanted to check on -- we spent a lot of time yesterday. We had some folks from DoD and from think tanks, talking about increasing missile production. I recall being in Huntsville and talking about launchers and the degree to which maybe your defense business has exposure to missile launchers and to that kind of ramp-up.

Yes. And munitions. I mean, so yes, we are part of the critical supply chain for a major manufacturer in that regard today. I think, therefore, you will see some appetite for us to scale up our capability to support their ability to scale up as it relates to a portion of that weapon platform. And we also have -- today, we've got a small glide munition that had a role to play for the special forces. We've developed a derivative of small cruise missile capability that's been in advanced flight testing. And now there is interest from the customer and yet even more impactful, affordable, low-cost containerized munition that we're in advanced discussions with the customer on. So look for us to play a role in that ecosystem, too. And clearly, there is a lot of appetite and need to get more capacity in the supply base there.

Excellent. Great. Chris, thank you very much. Appreciate it.

Thanks, Seth. Appreciate it.