Leidos' 2025 Q3 Earnings Call: Contradictions in M&A Strategy, Defense Systems Growth, and Health & Civil Margins

Date of Call: November 4, 2025

Financials Results

• Revenue: $4.47B, up 7% YoY (6% organic)
• EPS: Non-GAAP diluted EPS $3.05, up 4% YoY

Guidance:

• Revenue guidance reaffirmed at $17.0B–$17.25B
• Adjusted EBITDA margin guidance raised from mid-13% to high-13%
• Non-GAAP diluted EPS guidance raised to $11.45–$11.75 (up $0.30 at midpoint)
• Operating cash flow reaffirmed at approximately $1.65B

Business Commentary:

* Revenue Growth and Profitability: - Leidos reported revenue of $4.47 billion for Q3 2025, up 7% year-over-year and 5% sequentially. - The growth was driven by top-line expansion in multiple segments, including National Security and Digital, and Health & Civil, despite headwinds from government efficiency reviews and a recent government shutdown.

• Defense Systems Growth:
• The Defense Systems segment grew by 11% year-over-year in Q3, marking its seventh consecutive period of high single to low double-digit growth.

• This growth was supported by increased volumes in Integrated Air Defense, radar surveillance systems, and small glide munitions programs, reflecting the company's focus on leveraging its defense tech capabilities to meet mission requirements.

• Energy Infrastructure Expansion:

• Energy infrastructure revenue contributed to more than $600 million in annual revenues for Leidos, growing by double-digit CAGRs over the past seven years.

• This growth is attributed to robust investment by electric utilities in grid expansion and reliability improvement, using innovative tools like Leidos' Skywire software, which enhances engineering efficiency and reduces project costs.

• Health & Civil Segment Performance:

• The Health & Civil segment saw a 6% year-over-year increase in revenue, driven by volume growth in infrastructure operations and medical disability exam volumes.
• The segment's record non-GAAP operating income margin of 25.7% was supported by successful deployment of a key fixed-price program and a focus on technological advancements to improve care efficiency and timeliness.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management cited 'top line growth of 7%', 'adjusted EBITDA margin of 13.8%', $711M operating cash flow, and said they 'raised guidance for 2025' while increasing buybacks/dividend — signaling confidence and momentum.

Q&A:

• Question from Kenneth Herbert (RBC Capital Markets): Specifically, how do we think about M&A in this environment? Where are you focused and might you accelerate acquisitions?
  Response: M&A will be used selectively in NorthStar 2030 priority areas; the company remains judicious with hurdle rates while balancing buybacks, dividends and organic investment.

• Question from Sheila Kahyaoglu (Jefferies LLC): How do you think about growth in Defense Systems and moving past DOGE and potential issues with civil customers?
  Response: Defense Systems is a key growth driver — tracking ~10 franchise programs (~$15B over five years) shifting from R&D to LRIP and expected to accelerate growth.

• Question from Peter Arment (Robert W. Baird): Can you discuss sustainability of expanded margins in Health & Civil given record exam volumes?
  Response: Management expects margins to be sustainable due to ongoing investments in quality, efficiency and AI and by expanding services into rural/behavioral health and other managed-health opportunities.

• Question from Tobey Sommer (Truist Securities): How do submitted bid expectations compare this year and into 2026?
  Response: Pipeline is $69B with $24B submitted awaiting adjudication; expect a pickup post-shutdown and a higher submittal year in 2026.

• Question from Jonathan Siegmann (Stifel): Preview outlook for the medical exam business next year and environmental impacts?
  Response: Demand should remain elevated and volumes sustainable, though a fourth provider limits upside; focus is on innovation/technology to retain share and prepare for the 2026 recompete.

• Question from Gavin Parsons (UBS Investment Bank): What are you assuming for shutdown impact in 4Q and where are you focusing investment?
  Response: Guidance ranges are widened to reflect shutdown risk (trend to high end if it ends soon); investments prioritized in AI/technology and capacity (e.g., Huntsville) via an innovation fund.

• Question from Seth Seifman (JPMorgan Chase): Does required CapEx/capacity for moving programs to production already exist or will investments shift forward?
  Response: Most production CapEx has been made; 2025 underspent vs original plan with some deferrals that could move into early 2026, but capacity can be increased within the long-term affordability envelope.

• Question from Colin Canfield (Cantor Fitzgerald): Normalizing for shutdown, what are key puts/takes for bridging to mid- to high-single-digit organic growth next year?
  Response: Too early for precise 2026 metrics, but Defense Systems and energy infrastructure (and a large intelligence award ramp) are primary growth levers while small divestitures/program exits modestly reduce headwinds.

• Question from Samantha Stiroh (BofA Securities): Where is international seeing pockets of strength or slowness?
  Response: International is focused on Australia and the U.K.; both markets have leadership and are being grown opportunistically aligned to NorthStar 2030 pillars with selective expansion elsewhere.

• Question from Scott Mikus (Melius Research): Does it make sense to explore spinning off Dynetics to capture higher valuation?
  Response: No plans to spin off; management intends to invest in Dynetics as a 'crown jewel' and highlight its integrated defense tech value within Leidos.

• Question from Gautam Khanna (TD Cowen): Any color on recompetes next year and are there lumpier ones to monitor?
  Response: Cannot yet quantify percent of sales tied to recompetes; watching reserve health readiness and an Australian airborne recompete (and CBP), but 2026 is expected to be more weighted toward new business.

Contradiction Point 1

M&A Strategy and Shareholder Value

It involves changes in the company's approach to mergers and acquisitions and its commitment to shareholder value, which can impact investor perceptions and strategic direction.

Can you discuss M&A opportunities and the potential to accelerate acquisitions? - Kenneth Herbert(RBC Capital Markets, Research Division)

2025Q3: Leidos is focused on shareholder-friendly capital deployment. M&A will be more considered with specific growth areas. The strategy is to grow top and bottom lines organically and inorganically. The company is prudent and focused on shareholder value, judicious in capital deployment choices. - Thomas Bell(CEO)

Can you discuss bookings this year and growth reacceleration beyond 2025? - Gautam Khanna(TD Cowen)

2025Q4: We have a performance focus in 2025 to continue to deliver on margin expansion and cash flow generation. We are maintaining our disciplined M&A approach, where we're looking for accretive opportunities in our growth areas. - Chris Cage(CFO)

Contradiction Point 2

Defense Systems Segment Growth and Pivot

It highlights differing perspectives on the growth trajectory and strategic pivot within the Defense Systems segment, which is a crucial part of Leidos' business.

How do you assess the growth in the Defense Systems segment and the impact of civil customer issues? - Sheila Kahyaoglu(Jefferies LLC, Research Division)

2025Q3: Defense Systems is a high-growth segment with major franchise programs like air and base defense, counter-UAS, and hypersonics. The pivot is from heavy R&D to LRIP and programs of record. Portfolio resilience is seen, especially in mission-essential programs, with continued double-digit growth in defense. - Thomas Bell(CEO)

Has federal spending been disrupted by the new administration, and is the disruption ongoing? - Matthew Akers(Wells Fargo)

2025Q4: Defense Systems continues to perform extremely well with record sales in December and we're off to a strong start in January. Defense Systems is on track to deliver double-digit organic revenue growth for 2024, driven by the strength of our mission-essential and critical infrastructure businesses. - Thomas Bell(CEO)

Contradiction Point 3

Health & Civil Segment Margin Sustainability

It involves differing statements on the sustainability of margin improvements in the Health & Civil segment, which affects financial projections and investor confidence.

Can you discuss the sustainability of margin improvements in Health & Civil? - Peter Arment(Robert W. Baird & Co. Incorporated, Research Division)

2025Q3: Strong performance driven by innovation and investment, positioning Leidos for margin sustainability. Growth pillars are expanding, and technology investments are key to maintaining efficiency. - Chris Cage(CFO)

Can you grow EBITDA and free cash flow post-VBA transition? - Gavin Parsons(UBS Investment Bank, Research Division)

2025Q4: The Health segment is expected to see continued margin expansion with an eye toward maintaining the best-in-class profitability. - Chris Cage(CFO)

Contradiction Point 4

M&A Strategy and Capital Deployment

It highlights a shift in Leidos' strategic approach to mergers and acquisitions, which could impact future growth and investment decisions.

Are there opportunities for M&A and potential to accelerate acquisitions? - Kenneth Herbert (RBC Capital Markets, Research Division)

2025Q3: Leidos is focused on shareholder-friendly capital deployment. M&A will be more considered with specific growth areas. The strategy is to grow top and bottom lines organically and inorganically. The company is prudent and focused on shareholder value, judicious in capital deployment choices. - Thomas Bell(CEO)

Do you see benefits in the O&M funding included in the reconciliation bill? - Josh Tyler Korn (Barclays)

2025Q2: Our strategy has been and will continue to be to grow both the top line and the bottom line through both organic and inorganic growth on both sides of the house. And we have been growing and have been very successful, as you know, particularly on the defense side. On the civilian side, we've added some new capabilities through acquisition. - Thomas Bell(CEO)

Contradiction Point 5

Defense Systems Growth and Recompetes

It involves the company's expectations for growth and recompetes in the Defense Systems segment, which are important indicators of business performance.

What are your expectations for growth in the Defense Systems segment and the impact of civil customer issues? - Sheila Kahyaoglu(Jefferies LLC, Research Division)

2025Q3: Defense Systems is a high-growth segment with major franchise programs like air and base defense, counter-UAS, and hypersonics. The pivot is from heavy R&D to LRIP and programs of record. Portfolio resilience is seen, especially in mission-essential programs, with continued double-digit growth in defense. - Thomas Bell(CEO)

Can you update us on larger contracts like NGEN and their impact from the current contracting environment? Can you discuss the decline in the Health & Civil segment? - Peter Arment (Baird)

2025Q1: National Security and Digital segment saw traction on new contract awards and tasking on franchise programs. - Tom Bell(CEO)