Leidos Holdings, Inc. (NYSE:LDOS) Q2 2023 Earnings Call Transcript

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Chris Cage: Yes, thanks, Peter. I mean, first of all, obviously the team here wants to deliver against the original commitment, but the wider range was prudent, given where we are and the volatility you’d seen in the first half of the year. But I’m very encouraged about the second half and very optimistic about how we’ll progress from here. I would point to a couple of things. Security products is an element of that, and as I said in my prepared remarks, we have the potential to have a significantly stronger second half there. We’ve laid a lot of good groundwork to realize that. Not everything is within our control. On top of that, there are a couple other things. In Health, we had a great quarter in Health and the team has done an excellent job, and there is the opportunity to sustain that momentum as we move forward.

But some of that is dependent upon not only our performance, but throughput and customer satisfaction, some variables on incentives that, again, we’ll monitor closely, and our past performance suggests that those are fully attainable. So that’s another variable that we wanted to give ourselves some capacity for because that incentive calculations is somewhat new. And then lastly, just some of our digital monetization programs continue to ramp up and we’re very pleased with the performance the team has executed against there. And there are some opportunities for more project work in the back half of the year. And depending upon how and when that comes to pass, could push us towards the higher end of that range.

Peter Arment: Appreciate it. Thanks, Chris.

Operator: Our next question is coming from the line of Matt Akers with Wells Fargo. Please proceed with your questions.

Matt Akers: Yes. Hey, guys, good morning, and welcome to Tom. I wanted to ask about defense margins, kind of the strongest margins here we’ve seen in a little bit. Could you just talk about sort of how sustainable that is as we get into the back half and into 2024?

Chris Cage: Hey, thanks, Matt. Yes, obviously, we’re super pleased with the performance there. 9.3% OI margin, the highest in five years, and a lot of that’s led by progress we’ve seen on some of our big digital monetization programs. And the team’s done an excellent job there with NGEN, and DES is continuing to ramp, and there are others. And there are some other things going on that are sustainable outside of that, maturing development programs. Tom talked about Wide Field of View, especially Tranche 1, incorporating the lessons learned from Tranche 0, better mix overall with the Australian airborne aviation business that we acquired last year. That’s helping us. And then there are some variable items, and I wouldn’t say these are totally one-off, but we need to continue to perform well to realize these in the future.

Award fee scores were very strong. We reached certain program milestones, and we did close out some old older projects. So, we won’t deliver 9.3 every quarter near term, but that’s the expectation we’re setting for ourselves and the team longer term. And so, one thing that we will not take our eye off the ball on is an underpinning focus on indirect cost management and program execution. So, yes, great progress in the Defense Solutions segment and we’re optimistic that there’s more of that ahead of us.

Matt Akers: Okay, thanks. And then I wanted to ask about DES. We haven’t talked a lot about it, just how you’re thinking about the timing, and does that ramp up here as we get into 2024?

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