Leidos' Q3 2025: Contradictions Emerge on Defense Systems Growth, M&A Strategy, and Government Shutdown Impact

Date of Call: Date not provided (Q3 2025 earnings call)

Financials Results

• Revenue: $4.47B, up 7% year-over-year (6% organic); sequential growth +5% (best Q3 sequential since 2020)
• EPS: $3.05 non-GAAP diluted EPS, up 4% year-over-year (YTD EPS up ~18%)
• Operating Margin: Adjusted EBITDA margin 13.8%, up 3% year-over-year

Guidance:

• Reaffirming 2025 revenue guidance of $17.0B–$17.25B.
• Raising adjusted EBITDA margin guidance from mid-13%s to high-13%s (now ~13.8% reported this quarter).
• Raising non-GAAP diluted EPS guidance to $11.45–$11.75 (midpoint +$0.30).
• Reaffirming operating cash flow guidance of approximately $1.65B; timing of cash collections may be impacted by the government shutdown.

Business Commentary:

• Revenue and Earnings Growth:
• Leidos achieved top-line growth of 7% for Q3 2025, with adjusted EBITDA margin reaching 13.8% and operating cash flow of $711 million.
• Growth was driven by strong performance across segments, including national security and digital, and an increase in government contract awards.

• Defense Systems and Energy Infrastructure Growth:
• Leidos' defense systems segment grew 11% year-over-year and is on its seventh consecutive quarter of high single to low double-digit growth.

• The energy infrastructure segment, which has grown double-digit figures for seven years, now represents over $600 million in annual revenues, boosted by increased utilities investments and Leidos' Skywire AI platform.

• Impact of Government Shutdown and Efficiency Reviews:

• Despite headwinds from a government shutdown and efficiency reviews, Leidos managed to maintain sequential growth, with a 5% increase in revenues for Q3 2025.

• The company's resilience is attributed to a diverse portfolio and customer focus on mission-essential programs and outcome-based contracting.

• Investment in AI and Strategic Growth:

• Leidos is accelerating AI deployment across its business, with investments aimed at enhancing customer outcomes and operational efficiency.
• The company's strategy focuses on leveraging AI and innovation to expand its energy infrastructure, digital modernization, and cybersecurity sectors.

Sentiment Analysis:

Overall Tone: Positive

• Management called it “another excellent quarter” with top-line growth of 7%, adjusted EBITDA margin of 13.8%, and $711M operating cash flow; two guidance raises in 2025 and a $100M repurchase plus $450M debt paydown underscore confidence and shareholder returns.

Q&A:

• Question from Ken Herbert (RBC): How do you think about M&A in this environment, areas of focus, and potential to accelerate acquisitions?
  Response: Will pursue disciplined, accretive M&A targeted to defined North Star 2030 growth pillars while maintaining shareholder-friendly capital allocation (share repurchases/dividend); inorganic activity now an explicit part of the playbook.

• Question from Sheila Kahyaoglu (Jefferies): How do you think about growth in defense systems and risks from DoD/civil customer issues?
  Response: Defense systems is a core growth engine—tracking ~10 franchise programs (~$15B over five years) shifting from R&D to LRIP/production; business is well-positioned and resilient despite some digimod impacts.

• Question from Peter Arment (Baird): Sustainability of health & civil segment margins and the record medical exam volumes going forward?
  Response: Expect to sustain strong margins and volumes via continued investment in AI, process innovation, and expansion into related managed-health services; competition exists but team is positioned to maintain performance.

• Question from Toby Summer (Truist): Views on bid/submittal expectations for next year and implications for 2026 growth?
  Response: $69B near-term pipeline with $24B of bids awaiting adjudication; expect shutdown-driven delays to reverse and for 2026 to be a heavier submittal and book-to-bill year.

• Question from Gavin Parsons (UBS): What are you assuming for shutdown impact in Q4 and where are you focusing investments that will show in the financials?
  Response: Guidance ranges widened to hedge shutdown risk; if shutdown ends expect to trend toward high end of ranges; cash timing uncertain; stepped-up investments focused on AI/technology and defense capacity via an innovation fund.

• Question from Stuart Simon (JPMorgan): Does current CapEx underspend reflect moved investments or a conservative initial outlook; is capacity to ramp production already in place?
  Response: Most production-related CapEx already done; overall 2025 CapEx underspent versus original plan but company can modestly increase defense-related CapEx if customer demand requires while keeping overall CapEx within historical expectations.

• Question from Mariana Perez Mora / Samantha Steier (Bank of America): How is the international business performing and where are pockets of strength or weakness?
  Response: International focus on U.K. and Australia with bullish growth aligned to North Star 2030 pillars; opportunistic and selective expansion elsewhere, but growth will be local and disciplined.

• Question from Scott Mikus (Melius Research): Does it make sense to explore spinning off Dynetics to realize higher valuation?
  Response: No plans to spin off Dynetics; management intends to invest in and integrate Dynetics as a strategic, high-value asset within Leidos to drive differentiated, mission-capable offerings.

• Question from Gautam Khanna (TD Cowen): Any notable recompetes to monitor next year and what percentage of sales might be at risk?
  Response: Cannot quantify % yet; highlighted Reserve Health Readiness (potential decision in Q4) and an Australian airborne program as material recompetes—overall 2026 expected to be weighted toward new business and takeaways.

Contradiction Point 1

Defense Systems Growth and Opportunities

It involves differing perspectives on the growth and opportunities within the defense systems segment, which is a critical component of Leidos' business strategy.

How does Leidos view the growth in the defense systems segment, given recent competitor challenges with civil customers? - Sheila Kahyaoglu (Jefferies)

2025Q3: We have 10 franchise programs, Tom mentioned, that are going to provide $15 billion in potential value over the next 5 years. - Chris Cage(CFO)

What opportunities does the Supplemental Defense Bill present in missile defense and maritime sectors? - Colin Canfield (Cantor Fitzgerald)

2025Q1: A lot of the opportunity we highlighted in defense systems is already baked into the backlog. With those - again, with those changes we've made to the backlog, that's really the opportunity set. - Chris Cage(CFO)

Contradiction Point 2

M&A Strategy and Focus

It involves changes in the company's strategy regarding mergers and acquisitions, which can significantly impact Leidos' long-term growth and financial health.

How is Leidos approaching M&A in the current environment? What specific opportunities and potential for accelerated acquisitions exist? - Ken Herbert (RBC)

2025Q3: We're going to be really focused in these -- on these specific opportunities that align with the North Star 2030 growth areas, making sure that all capital deployments are meeting shareholder value hurdles. - Chris Cage(CFO)

How will Leidos accelerate growth beyond the current 4% rate, especially in the Civil segment, and achieve margin expansion? - Colin Michael Canfield (Cantor Fitzgerald & Co.)

2025Q2: We will only do M&A where it creates shareholder value, where it supports our strategy and something that we're smartly going to do, but it's not our core focus on growth. - Christopher R. Cage(CFO)

Contradiction Point 3

Impact of Government Shutdowns

It involves differing assessments of the impact and preparedness for government shutdowns, which can significantly affect Leidos' operations and financial performance.

What are Leidos's assumptions about Q4 shutdown impact, and how is the company prioritizing future tech investments? - Gavin Parsons (UBS)

2025Q3: We've underneath that scenario, a range of $75 million to $125 million of impact in Q4 revenue. It's obviously a wide range, because we just don't know how long this thing is going to last or how severe it's going to be. - Chris Cage(CFO)

How are you addressing the impact of government actions on revenue, such as with NGEN contracts? What changes were made to the backlog process, and why was Health & Civil the only segment to decline? - Peter Arment (Baird)

2025Q1: I think the most important thing is differentiating Leidos, from the rest of the market, we do business with 50 of 53 different agencies in the government, so our customer footprint spans the entire spectrum of government segments. - Tom Bell(CEO)

Contradiction Point 4

Defense Systems Segment Growth

It highlights differing expectations for the growth and potential of the defense systems segment, impacting investor perceptions of Leidos' strategic direction.

How does Leidos assess defense systems segment growth amid civil customer issues highlighted by recent competitor cases? - Sheila Kahyaoglu(Jefferies)

2025Q3: Tom Bell highlights the strength of the defense systems business, with plans to deliver $15 billion in potential value from 10 franchise programs over five years. - Tom Bell(CEO)

Can you discuss bookings this year's impact and 2026 growth acceleration? - Gautam Khanna(TD Cowen)

2025Q4: Our momentum will continue to build over the next four years, driven by our growth initiatives and strong cash generation. - Chris Cage(CFO)

Contradiction Point 5

M&A Strategy and Opportunities

It involves differing statements on the M&A strategy and opportunities, which are crucial for Leidos' growth and strategic positioning.

How is Leidos approaching M&A in the current environment? What specific acquisition opportunities exist, and is there potential for acceleration? - Ken Herbert(RBC)

2025Q3: Leidos maintains a shareholder-friendly view of capital deployment, focusing on organic growth and strategic M&A. The company is now more focused on M&A opportunities aligned with North Star 2030 growth areas. - Chris Cage(CFO)

What factors influenced EPS growth guidance, and does it reflect conservatism due to the administration change? - Scott Mikus(Melius Research)

2025Q4: We'll continue to drive shareholder value with a balanced financial approach, leveraging existing capital to invest in our business, exploring strategic tuck-in acquisitions to further fortify our capabilities, and returning a significant portion of capital to shareholders. - Chris Cage(CFO)