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Leidos Holdings posts record margins, robust cash flow, and raises FY2025 outlook on strong Q2 execution and AI-driven efficiencies, despite some one-off gains and a book-to-bill dip.

# Leidos Holdings Delivers Record Margins and Raises FY2025 Outlook on Strong Q2 Execution

---

## Executive Summary

- **Leidos Holdings, Inc. (LDOS) delivered a robust Q2 FY2025**, with revenue of **$4.25B** (+3% YoY organic growth) and **non-GAAP EPS of $3.21** (+22% YoY), both exceeding consensus expectations. Growth was supported by strong segment performance, particularly in Defense Systems (**+10% YoY**), and aided by one-off items including a **$25M insurance reimbursement** and **$8M tax refund**.
- **Profitability reached new highs**, with adjusted EBITDA margin at **15.2%** (up from 13.5% YoY) and operating margin at **13.4%** (vs. 11.5% YoY), reflecting disciplined cost management and operational efficiencies. AI-driven initiatives contributed to a **30% reduction in software development time** and **40% faster invoice processing**.
- **Management struck a bullish tone**, highlighting robust execution, strategic investments in AI and automation, and a raised full-year outlook for revenue, EPS, EBITDA margin, and cash flow. The company acknowledged some headwinds from government budget uncertainties and procurement delays but emphasized a strong underlying pipeline.
- **Risks remain** around U.S. government budget cycles, procurement timing, and geopolitical factors, but Leidos’ **$46.2B backlog** (with **$7.1B funded**) and ongoing cost initiatives provide multi-year revenue visibility and margin support.
- **Catalyst watch:** Investors should monitor the pace of new contract awards (book-to-bill below 1.0 this quarter), progress on AI-driven efficiency gains, and any updates on U.S. government budget negotiations.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $4.25B     | $4.18B    | +$70M    | +3%        |
| GAAP EPS              | $3.01      | $2.45     | +$0.56   | +27%       |
| Non-GAAP EPS          | $3.21      | $2.63     | +$0.58   | +22%       |
| Adjusted EBITDA Margin| 15.2%      | 13.8%     | +140bps  | +170bps    |
| Operating Margin      | 13.4%      | 12.0%     | +140bps  | +190bps    |
| Book-to-Bill Ratio    | 0.92x      | 1.05x     | -0.13x   | -0.10x     |
| Backlog               | $46.2B     | $45.8B    | +$0.4B   | +2%        |
| Funded Backlog        | $7.1B      | $6.8B     | +$0.3B   | +4%        |
| Operating Cash Flow Conversion | 124% | 110% | +14pp | +18pp |
| Free Cash Flow Conversion      | 110% | 95%  | +15pp | +20pp |

---

## Earnings Quality

Leidos Holdings’ Q2 revenue growth was **broad-based but led by Defense Systems (+10% YoY)**, offsetting slower growth in Civil and Health segments. The **record adjusted EBITDA margin of 15.2%** and improved operating margin reflect **sustained cost discipline**, with notable reductions in SG&A and restructuring costs. AI and automation initiatives are driving tangible productivity gains, supporting margin expansion even as revenue growth moderates. While one-off items (insurance reimbursement, tax refund) boosted profitability, underlying cash flow quality remains strong, as evidenced by **operating cash flow conversion of 124%** and **free cash flow conversion of 110%**.

---

## Management Commentary & Guidance

Management’s tone was **decisively bullish**, emphasizing robust execution, strong segment performance, and the benefits of strategic investments in AI and automation. The company **raised full-year guidance** for revenue, EPS, EBITDA margin, and cash flow, citing a healthy pipeline and operational momentum. While acknowledging a book-to-bill ratio below 1.0 (due to contract timing), management expressed confidence in the backlog and future award activity. Caution was noted regarding U.S. government budget uncertainties and procurement delays, but the overall outlook remains optimistic.

---

## Key Risks

- **Cost Inflation & Margin Pressures:** While cost discipline has improved, inflationary pressures and wage growth could impact future margins.
- **Regulatory & Demand-Side Risks:** U.S. government budget cycles, procurement delays, and geopolitical uncertainties could affect contract timing and revenue recognition.
- **One-Off Items:** Non-recurring gains (insurance, tax) contributed to Q2 outperformance and may not repeat in future quarters.

---

## Expected Market Reaction

Analysts and investors are likely to **respond positively** to Leidos Holdings’ strong headline results, record margins, and raised guidance. However, some caution may persist due to the impact of one-off items on profitability and the book-to-bill ratio dipping below 1.0. The market may be underappreciating the quality of cash flow and the durability of operational improvements, while potentially overvaluing transient gains.

---

## Final Takeaway

**Leidos Holdings delivered a strong Q2 FY2025**, marked by record margins, robust cash flow, and raised guidance, underpinned by operational excellence and strategic investments in AI and automation. While the quarter benefited from some non-recurring items, the underlying fundamentals—especially the healthy backlog and efficiency gains—support a positive outlook. The market may be underpricing the sustainability of these improvements and the strength of the bookings pipeline.

**Upcoming catalysts:**  
- New contract award announcements and book-to-bill recovery  
- Updates on U.S. government budget negotiations and procurement cycles

Overall, this was a **strong quarter** for Leidos Holdings, with clear evidence of margin expansion and operational momentum, though investors should remain mindful of external risks and the impact of one-off items on near-term results.

Leidos (LDOS): Record Margins, Raised FY2025 Outlook

Leidos (LDOS) is poised for Q2 earnings upside, driven by margin expansion and backlog policy changes, despite near-term booking softness and working capital volatility.

# Leidos Holdings (LDOS): Margin Momentum and Backlog Nuances Set the Stage for Q2 Earnings Upside

## Executive Summary

We are **bullish** on Leidos Holdings (NYSE: LDOS) heading into the upcoming quarter, driven by **sustained margin expansion** and **resilient segment performance** despite recent softness in bookings. Q1 FY2025 revenue of **$4.245B** (+12% YoY in Commercial & International) and a notable **operating margin improvement to 12.5%** signal strong execution and cost discipline. While the **book-to-bill ratio’s drop to 0.5** introduces near-term caution, the market may be underestimating the impact of a **recent backlog reporting policy change**—which could accelerate recognized revenue as sole source IDIQ contracts convert. Investors should closely watch the integration of the $300M cyber acquisition and evolving working capital trends, as these will be pivotal for Q2 results.

## Recent Trends Signal What’s Next

Leidos’ last two quarters highlight a **clear upward trajectory in operating margins** and **broad-based revenue growth**, particularly in Health & Civil and Defense Systems. Q1 FY2025 saw total revenue reach **$4.245B** (up from $4.08B in Q4 FY2024), with operating margin climbing to **12.5%** from 11.8% sequentially. Net margin also improved, reflecting both pricing power and cost controls. However, the **book-to-bill ratio’s sharp decline** (from 1.7–1.9 in prior quarters to 0.5 in Q1) suggests a potential lag in future revenue conversion.

### Quarterly Financial Trend Table

| Quarter      | Revenue ($B) | Gross Margin | Operating Margin | Net Margin | EPS   |
|--------------|--------------|--------------|------------------|------------|-------|
| Q2 FY2024    | 3.98         | 18.2%        | 11.2%            | 6.5%       | 2.45  |
| Q3 FY2024    | 4.01         | 18.7%        | 11.5%            | 6.8%       | 2.52  |
| Q4 FY2024    | 4.08         | 19.0%        | 11.8%            | 7.0%       | 2.60  |
| Q1 FY2025    | 4.25         | 19.5%        | 12.5%            | 7.5%       | 2.77  |

**Trend:** Revenue and margins have steadily improved over the last four quarters, with Q1 FY2025 marking a high point in both operating and net margin.

## Management’s Forward Tone and Positioning

Management’s recent commentary has shifted to a **more proactive and confident tone**. In the Q1 2025 earnings call, executives described a “**strong Q1**” and “**robust demand**,” despite acknowledging softer bookings. The CEO stated, “We’re seeing early signs of normalization in demand and remain well positioned for the year.” This contrasts with the more cautious language of prior quarters, where management emphasized “uncertainty in the federal funding environment.” The reaffirmation of full-year guidance (revenue of $16.9B–$17.3B, Non-GAAP EPS of $10.35–$10.75) further signals **confidence in execution and resilience**.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs will be critical for Q2:

- **Book-to-Bill Ratio:** Fell to **0.5** in Q1 FY2025 (from 1.7–1.9 in prior quarters), indicating a slowdown in new orders and potential revenue recognition delays.
- **Backlog:** Maintained at **$46.3B**, down slightly QoQ, but now includes estimated future revenue from sole source IDIQ contracts.
- **Operating Margin:** Rose to **12.5%** in Q1, with further improvement likely as cost controls and segment mix continue to favor higher-margin businesses.

### KPI Movement Table

| KPI                | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Book-to-Bill Ratio | 1.8       | 1.7       | 0.5       | -1.3       | -1.2       |
| Backlog ($B)       | 47.1      | 46.7      | 46.3      | -0.8       | -0.4       |
| Op. Margin (%)     | 11.2      | 11.8      | 12.5      | +1.3       | +0.7       |

**Implication:** While backlog and book-to-bill trends warrant caution, margin expansion and backlog composition changes could offset near-term order softness.

## Missed by the Street

A **subtle but material change in backlog reporting**—now including estimated future revenue from sole source IDIQ contracts—may be underappreciated by consensus models. As management noted, “We expanded backlog to include estimated future revenue,” (Q1 2025 Earnings Call), which could **accelerate recognized revenue** as these estimates convert to orders. Additionally, the **$246M increase in receivables** (Q1 2025 10-Q) signals working capital volatility that could pressure cash flow, a risk not fully reflected in current estimates.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS   | Operating Margin | Key Assumptions                                              |
|----------|--------------|-------|------------------|--------------------------------------------------------------|
| Bull     | 4.50         | 2.95  | 13.0%            | Bookings rebound, cyber acquisition accretive, cost leverage |
| Base     | 4.25         | 2.77  | 12.5%            | Current trends persist, moderate bookings, stable costs      |
| Bear     | 4.00         | 2.50  | 12.0%            | Bookings remain soft, working capital pressures persist      |

**Most Likely:** The **Base case** is most probable, given management’s reaffirmed guidance, margin momentum, and backlog stability, but with some risk from bookings softness and working capital swings.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS   | Operating Margin |
|--------------|--------------|-------|------------------|
| Q2 FY2024    | 3.98         | 2.45  | 11.2%            |
| Q3 FY2024    | 4.01         | 2.52  | 11.5%            |
| Q4 FY2024    | 4.08         | 2.60  | 11.8%            |
| Q1 FY2025    | 4.25         | 2.77  | 12.5%            |

### KPI Movement Table

| KPI                | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Book-to-Bill Ratio | 1.8       | 1.7       | 0.5       | -1.3       | -1.2       |
| Backlog ($B)       | 47.1      | 46.7      | 46.3      | -0.8       | -0.4       |
| Op. Margin (%)     | 11.2      | 11.8      | 12.5      | +1.3       | +0.7       |

### Key Management Quotes

1. **“We’re seeing early signs of normalization in demand and remain well positioned for the year.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Management expects demand to stabilize, supporting revenue visibility.*

2. **“We expanded backlog to include estimated future revenue.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Backlog now better reflects future revenue potential, possibly accelerating recognition.*

3. **“Operating margin improved to 12.5% on the back of cost discipline and favorable mix.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Margin expansion is structural, not just cyclical.*

4. **“Book-to-bill ratio of 0.5 reflects timing of large contract awards.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Bookings softness may be temporary, but bears monitoring.*

5. **“We continue to expect full-year revenue in the range of $16.9 to $17.3 billion.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Guidance reaffirmed, signaling confidence in execution.*

6. **“Receivables increased by $246 million, impacting operating cash flow.”**  
   *Q1 2025 10-Q*  
   *Interpretation: Working capital volatility could pressure near-term liquidity.*

7. **“The planned $300 million cyber acquisition will enhance our portfolio and earnings power.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: M&A is a near-term catalyst for growth and margin improvement.*

---

**Bottom Line:** Leidos enters Q2 with strong margin momentum and a more robust backlog composition, but investors should closely monitor bookings and working capital trends for any signs of near-term turbulence. The market may be underestimating the positive earnings impact from backlog policy changes and the upcoming cyber acquisition.

LDOS: Margin Gains Offset Bookings Caution