Leidos CEO touts $7.9B Army win as a model for its future

One of Tom Bell's priorities since he started as Leidos' chief executive in May has been to lead the work on, in his words, "building a quality backlog over time with quality wins that speak to long-term growth."

Those words come from the initial observations Bell shared with investors during his first quarterly earnings call with them back in August.

Fast forward to Leidos' fourth quarter call on Tuesday and Bell had one of those wins to talk about with analysts: the Army's Common Hardware Systems-6 contract that has a $7.9 billion ceiling over up to 10 years.

Leidos unseated the longtime incumbent in General Dynamics to secure CHS-6, through which the Army will continue buying commercial IT products and services.

Bids were due three months before Bell joined the company, but he wants that contract to be something Leidos can lean on for the future.

"It's a model that we expect to deploy going forward where we bring customers a value proposition that is compelling to them, both in the delivery we can give them and the speed with which we can spool up to solve their problems," Bell told analysts.

CHS-6 may have a significant IT component to it, but that does not cover the whole picture of what the Army is looking for as Bell sees it.

"It's the whole C5ISR domain, and so not only is it broad in what the customer can procure through CHS-6, but it's also a great example of how we can use the breadth and scale of Leidos to solve problems for customers," Bell added.

A second priority for Bell and his colleagues on Leidos' executive team has been the work on what he called "quickly redeveloping our growth playbook" for its international business, which is primarily concentrated in the U.K. and Australia.

Those two countries and the U.S. are all part of AUKUS, a trilateral security partnership focused on the Indo-Pacific region. AUKUS primarily focuses on military capability, a point of difference from the Five Eyes intelligence sharing alliance that includes those three countries plus Canada and New Zealand.

One of AUKUS' main agenda items is to help Australia acquire nuclear-powered submarines, commonly referred to as Pillar 1 of the alliance.

Bell candidly told analysts that Leidos has "no interest in building submarines." But the second and third AUKUS pillars focused on intelligence, data and digital systems are where Leidos' interest lies.

"The beauty of AUKUS is an incentive for the nations to collaborate. We are very excited about the opportunities that gives us to lower the thresholds of sharing data," Bell said. "We see it as an open door for us to promulgate Leidos capabilities that have been so piped in one country or the other across all those countries, and allow these great allies to punch above their weight collectively."

As for Leidos itself: the initiative to craft its new North Star vision remains in progress and its five segment presidents are working on how their teams will contribute to that.

Bell reiterated to analysts that acquisitions are "not a priority in 2024" for Leidos as the company takes further stock of what it already has, but inorganic growth will not necessarily be ignored either.

"The primary focus, first and foremost, will be what are the gaps, what are the needs we see our customers needing and how do we position Leidos best for those over time," Bell said. Obviously, if we can build it, we have the funds and the capability to provision for that. But if it's better, faster, cheaper and more expeditious for us to buy that, then M&A can come back into the playbook."

Fourth quarter revenue of $4 billion was up 8% from the prior year period, while profit of $452 million showed a 14% year-over-year increase in adjusted EBITDA (earnings before taxes, depreciation and amortization).

Full-year sales of $15.4 billion showed 7% growth from those of 2022 and adjusted EBITDA of $1.6 billion represented a 12% increase on the bottom line. The company reported a 10.8% adjusted EBITDA margin for 2023 compared to the 10.4% result for 2022.

Leidos' initial guidance for 2024 indicates revenue in the range of $15.7 billion-to-$16.1 billion and an adjusted EBITDA margin of mid-to-high 10%.

The company also ended 2023 with a total backlog of $37.0 billion, of which $8.8 billion is funded.