Leidos Q4 Revenue Drops 3.6% Amid Government Shutdown, Growth Still Evident

Date of Call: Feb 17, 2026

Financials Results

• Revenue: $4.2B for Q4, down 3.6% YOY; $17.2B for FY2025, up 3.1% YOY
• EPS: $2.76 non-GAAP diluted EPS for Q4; $11.99 for FY2025, up 17% YOY
• Operating Margin: Adjusted EBITDA margin 13.2% for Q4, up 160 bps YOY; 14.1% for FY2025, up 120 bps YOY

Guidance:

• Revenue for 2026 expected between $17.5B and $17.9B, up to 4% growth over 2025.
• Adjusted EBITDA margin expected in the mid-13s for 2026.
• Non-GAAP diluted EPS expected between $12.05 and $12.45.
• Operating cash flow expected at $1.75B; free cash flow will be down due to tripled CapEx to $350M.

Business Commentary:

Revenue Performance and Challenges:

• Leidos reported Q4 revenue of $4.2 billion, a year-over-year decrease of 3.6%. However, normalized for an extra work week in 2024 and a 6-week government shutdown in 2025, Q4 revenue would have grown by approximately 4%.
• The decrease was primarily due to the government shutdown and the extra work week, while the underlying business showed strong growth across several segments.

Bookings and Backlog Growth:

• The company achieved net bookings of $5.6 billion in Q4, maintaining a book-to-bill ratio of 1.3x, consistent with the previous quarter. Year-over-year funded backlog increased by 15%.
• This growth was attributed to alignment with administration priorities and strong business development, evidenced by significant new contract awards.

Segment Performance and Strategic Investments:

• Defense Systems reported strong performance with non-GAAP operating margins rising 680 basis points in Q4 and 160 basis points for the year, driven by increased production of key systems.
• The growth was supported by strategic investments in defense technology and increased production capacity, aligning with national security priorities.

Health Segment and Future Outlook:

• The Health segment generated $4.7 billion in revenues in 2025 with a non-GAAP operating income margin of 25.5%. For 2026, modestly lower revenue and margin are expected due to increased competition and transition phases.
• Long-term growth is anticipated through expansion in rural and behavioral health, with a focus on sustaining robust profitability above 20%.

Capital Investments and Organizational Alignment:

• Leidos plans to triple its capital expenditure to $350 million in 2026 to support key national priority projects. The company has also acquired ENTRUST Solutions Group to enhance its energy engineering capabilities.
• These actions reflect the company's strategy to invest in growth pillars and realign its organization to better execute its NorthStar 2030 strategy.

Sentiment Analysis:

Overall Tone: Positive

• CEO stated 'another strong quarter' and 'outstanding 2025'. CFO highlighted 'outstanding year' with 'third straight year of double-digit... growth'. Management emphasized 'strong momentum', 'robust pipeline', and confidence in strategy execution, with CEO expecting '2026 will be a year that traction from our strategic action becomes even more evident'.

Q&A:

• Question from Seth Seifman (JPMorgan Chase & Co): Could you talk about the investment areas for additional CapEx and if that supports defense ramp and relates to DoD co-investment opportunities?
  Response: CapEx is for co-investment opportunities with DoD and other agencies like FAA, and for all growth pillars, including health, not exclusively defense.

• Question from Seth Seifman (JPMorgan Chase & Co): How should we think about softer growth early in the year and which segments are weak?
  Response: Growth expected to be lower in first half, accelerate in second half due to new program starts, Golden Dome/FAA catalysts, and robust pipeline; about $7B in awards slipped from Q4 into early 2026.

• Question from John Godyn (Citigroup Inc.): Can you elaborate on the bookings backdrop and expectations for acceleration?
  Response: 1.3x book-to-bill ratio is due to years of investment in growth function; robust pipeline and high proposal activity expected to continue, with 3/4 of next year's bid activity focused on new business/takeaway.

• Question from Gautam Khanna (TD Cowen): What are expectations for the VA medical exam recompete and how will profitability be sustained?
  Response: RFP expected in middle of 2026; focus is on improving efficiency, effectiveness, and cost; health segment expected to sustain robust profitability above 20% long-term.

• Question from Colin Canfield (Cantor Fitzgerald & Co.): Where is conservatism in the FY26 guidance and what milestones could lift it? Is outperformance a basis for next year?
  Response: Conservatism in defense (e.g., Golden Dome, FAA) and health; upside possible if funding accelerates or recompete plays out better. No one-timers in guide; momentum expected to carry into 2027.

• Question from Tobey Sommer (Truist Securities, Inc.): Which defense tech areas have hit stride and which are developing for 2026?
  Response: IFPC, hypersonics, ABADS, space (SDA tranches) are key programs of record; investing in maritime and other areas with strong pipeline and customer interest.

• Question from Kenneth Herbert (RBC Capital Markets): How are you thinking about capital allocation, M&A, priorities, and buybacks after ENTRUST?
  Response: Inorganic/organic investments will be primary; dividend continues; no buybacks baked into guide due to ENTRUST; pro forma leverage at 2.6x, below 3x target.

• Question from Scott Mikus (Melius Research LLC): Is AI a concern for price compression in digital modernization?
  Response: AI is a force multiplier; internal beta testing will improve efficiency and help customers shift budgets to mission outcomes, not a race to the bottom.

• Question from Scott Mikus (Melius Research LLC): Does the guide assume task orders from Golden Dome/Microelectronics IDIQs?
  Response: IDIQs not included in backlog; task orders are not assumed in guidance, but represent upside if won; many opportunities in pipeline.

• Question from Jonathan Siegmann (Stifel, Nicolaus & Company, Incorporated): What is the progress on maritime programs and timing for announcements?
  Response: Robust dialogue with Navy on MUSV program; focus on mission payloads; firm plans expected soon but not yet issued.

• Question from Gavin Parsons (UBS Investment Bank): Can you expand mid-13% EBITDA margin beyond 2026?
  Response: Margin expansion expected in Homeland and Defense segments long-term; transformation office and ENTRUST to drive further efficiency and gains.

• Question from Greg Konrad (Jefferies LLC): How do you think about CapEx stepping up beyond 2026 and cash returns?
  Response: $350M CapEx is situation-dependent for scaling current programs; focus on optimizing working capital and returns; not necessarily new normal beyond 2026.

Contradiction Point 1

Growth Outlook and Timing

Growth expected to be lower in first half, accelerating second half, contradicts previous optimism for 2026.

Seth Seifman, what are your thoughts on JPMorgan Chase's recent earnings report? - Seth Seifman (JPMorgan Chase & Co)

2025Q4: Growth is expected to be lower in the first half and accelerate in the second half, propelled by catalysts like Golden Dome initiatives, FAA modernization, new program wins, and a robust business development pipeline. - Chris Cage(CFO)

You mentioned growth will accelerate to double-digit by year-end, suggesting slower growth initially. Which segment is experiencing this early weakness? - Tobey Sommer (Truist Securities)

2025Q3: The goal is for 2026 to be a submittal year that exceeds 2025, with a good mix of recompetes and new work, supported by strong win rates. 2026 is expected to be a big book-to-bill year. - Chris Cage(CFO)

Contradiction Point 2

M&A & Share Buyback Strategy

Shift from considering buybacks as a capital option to ruling them out for the year.

What are your thoughts on the recent earnings report? - Kenneth Herbert (RBC Capital Markets)

2025Q4: The company has capacity but will prioritize growth investments. No buybacks are baked into the 2026 guidance due to the ENTRUST acquisition. - Chris Cage(CFO)

What's your approach to incremental M&A opportunities this year and what does the guidance suggest for buybacks? - Kenneth Herbert (RBC Capital Markets)

2025Q3: Capital deployment (including organic investment, M&A, and share buybacks) will always be evaluated through a consistent lens of hurdle rates and shareholder value. - Thomas Bell(CEO)

Contradiction Point 3

Growth Trajectory Expectations

Expectations for first-half weakness versus consistent acceleration.

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2025Q4: Growth is expected to be lower in the first half and accelerate in the second half, propelled by catalysts like Golden Dome initiatives. - Chris Cage(CFO)

Which segment is experiencing weaker early-year growth as growth accelerates to exit or approach double-digit by year-end? - Gavin Eric Parsons (UBS Investment Bank)

2025Q2: Strong order intake is expected in the next two quarters as the administration moves to spend committed funds. - Thomas Bell(CEO)

Contradiction Point 4

CapEx Normalization

Characterization of the $350M CapEx increase as a temporary step-up versus a potential new normal.

What are your thoughts on the recent guidance revision? - Greg Konrad (Jefferies LLC)

2025Q4: The $350 million CapEx increase in 2026 is situation-dependent... The $350 million is not necessarily the new normal beyond this year. - Chris Cage(CFO)

What's your outlook for CapEx beyond this year, how much is in the backlog versus future decisions, and how do you assess cash-on-cash returns? - Jonathan Siegmann (Stifel)

2025Q2: The current environment favors demonstration-ready capabilities. Leidos is identifying rich investment opportunities to position for growth (e.g., upgrades at the Huntsville campus) in a capital-light manner. - Christopher R. Cage(CFO)

Contradiction Point 5

Margin Expansion Outlook

Shift from aiming to sustain mid-13% margin to targeting further expansion.

What are your key takeaways from the recent earnings results? - Gavin Parsons (UBS Investment Bank, Research Division)

2025Q4: The focus is on reprioritizing and funding growth while delivering exceptional results in 2027 and beyond. - Chris Cage(CFO)

Can you maintain and grow the mid-13% EBITDA margin beyond 2026? - Colin Michael Canfield (Cantor Fitzgerald & Co.)

2025Q2: Full-year margin guidance is raised to mid-13s; the focus is now on sustaining that level. - Christopher R. Cage(CFO)