Executive Summary / Key Takeaways

• Leidos demonstrated strong financial and operational performance in Q1 2025, building on a successful 2024, with organic revenue growth of 7%, adjusted EBITDA margin expansion to 14.2%, and non-GAAP diluted EPS growth of 30%.
• The company is actively implementing its NorthStar 2030 strategy, focusing investments on five growth pillars (Space & Maritime, Energy Infrastructure, Digital Modernization & Cyber, Highly Customized Critical Mission Software, Managed Health Services) aligned with growing customer needs and Leidos's differentiated capabilities.
• Management reaffirmed its full-year 2025 guidance, signaling confidence in its ability to maintain profitability near recent high levels and invest for future growth, despite potential near-term uncertainties related to the administration transition and government funding.
• Strategic capital allocation in Q1 included a significant accelerated share repurchase ($500M) and a targeted acquisition ($300M cyber company) aimed at accelerating key growth pillars and enhancing shareholder value.
• Leidos leverages differentiated technology, particularly in AI and Cyber, and its deep customer relationships to maintain a competitive edge and position itself for opportunities arising from the administration's focus on IT modernization, transformational warfighting, and government efficiency.

Setting the Scene: A Digital Mission Leader in a Dynamic Environment

Leidos Holdings, Inc. stands as a prominent digital mission and solutions leader, primarily serving the complex needs of the U.S. government across defense, intelligence, civil, and health sectors, while also engaging with international and commercial customers. With a history shaped by strategic mergers, including the significant integration of Lockheed Martin (LMT)'s IS&GS business in 2017 and the acquisitions of Dynetics and Security Detection & Automation in 2020-2021, Leidos has built a diverse portfolio of capabilities and a workforce of 47,000 global employees. This evolution has positioned the company to tackle critical national challenges, from securing cyberspace and modernizing IT infrastructure to developing advanced defense systems and transforming healthcare delivery for veterans.

The current operating environment is marked by dynamic shifts, including geopolitical tensions driving increased demand for advanced defense and intelligence capabilities, alongside a strong push from the new administration for greater government efficiency, IT modernization, and strategic investments in areas like energy infrastructure and healthcare access. Leidos's recently unveiled NorthStar 2030 strategy is a direct response to this landscape, designed to focus the company's efforts and investments on areas where customer needs are projected to grow robustly, market profitability is attractive, and Leidos possesses clear, accelerating technical differentiation. This strategy positions Leidos to capitalize on the administration's agenda, which emphasizes outcomes that are "better, faster, cheaper" – a core tenet of Leidos's business model.

Technological Edge: The Golden Bolts Driving Differentiation

At the heart of Leidos's competitive strategy lies its investment in and application of cutting-edge technology, referred to internally as its "golden bolts." These capabilities span trusted mission artificial intelligence (AI), cyber operations, digital modernization, mission software systems, integrated systems, mission operations, and rapid prototyping and manufacturing. Leidos views the "mission as the market" for AI, integrating Trusted Mission AI across its offerings to drive productive disruption. In cybersecurity, a core competency, the company has invested over $75 million in R&D over the past five years, developing patented technologies like Zero Trust methodologies, which have contributed to over $5 billion in awards citing this strength. The pending acquisition of a full-spectrum cyber company for $300 million is specifically aimed at accelerating this pillar, adding expertise in vulnerability research, reverse engineering, and cyber electronic warfare to strengthen its competitive position in the $15 billion pure cyber market and related opportunities.

Leidos's mission software systems demonstrate tangible benefits, such as the disability case processing system for the Social Security Administration, which improved processing time by over 90%, reduced backlog by over 50%, and increased accuracy by 20%. In rapid prototyping and manufacturing, the Dynetics business is advancing programs like the IFPC Enduring Shield air defense system and the Black Arrow small cruise missile. Black Arrow, a low-cost, 200-lb class system, completed successful flight tests and is designed for affordable mass production, addressing a critical DoD need for standoff strike capabilities. Leidos is under contract with USSOCOM for further testing in 2025. The company is also exploring quantum technologies for applications like thwarting GPS jamming, developing alternative navigation technology under a Defense Innovation Unit contract, highlighting its forward-looking approach to market needs. These technological strengths are foundational to Leidos's ability to deliver smarter, more efficient outcomes for its customers and are central to its competitive moat against rivals.

Operational Strength and Financial Momentum

Leidos commenced 2025 with strong financial results, building on the significant momentum achieved in 2024. For the three months ended April 4, 2025, the company reported revenues of $4.25 billion, representing robust organic growth of 7% year-over-year. This top-line expansion was coupled with impressive profitability improvements. Adjusted EBITDA reached $601 million, a 23% increase from the prior year quarter, driving adjusted EBITDA margin to 14.2%, a 190 basis point expansion. Non-GAAP diluted earnings per share saw a significant 30% rise to $2.97.

Performance was broad-based across the segments. Digital Health continued its standout performance, with revenues increasing 7.7% and segment operating income surging 34.7%, resulting in a high operating margin of 23.2%, driven by strong demand and case complexity in managed health services. Commercial & International posted double-digit revenue growth of 11.6%, its second consecutive quarter of such performance, fueled by volumes and program wins across its diverse portfolio, including security products and commercial energy. Defense Systems saw revenues climb 7.2% and operating income jump 61.9%, benefiting from program wins and decreased amortization expense, achieving its third straight quarter with a book-to-bill above one. National Security saw solid revenue growth of 4.7% and operating income growth of 5.7%.

The company's focus on cash generation remained evident, with $58 million in operating cash flow and $36 million in free cash flow in Q1 2025, influenced by the timing of payroll and employee benefit payments. Leidos maintains a healthy balance sheet, ending the quarter with $842 million in cash and cash equivalents and $5.1 billion in debt. The company's proactive debt management included issuing $1 billion in new senior notes in February 2025 to retire a maturing $500 million bond and fund a $500 million accelerated share repurchase program, which is expected to complete in Q2 2025. This capital allocation strategy, alongside a $1 billion unused revolving credit facility and commercial paper program, provides ample financial flexibility to support strategic investments and shareholder returns.

Competitive Arena: Positioning and Prowess

Leidos operates within a competitive landscape populated by large defense primes like Northrop Grumman (NOC), Lockheed Martin, and General Dynamics (GD), as well as IT and consulting firms such as Booz Allen Hamilton (BAH). Leidos differentiates itself through its unique blend of deep domain expertise across diverse government and commercial markets and its focus on leveraging digital and technological innovation to deliver integrated solutions.

While competitors like LMT and NOC may possess greater scale and dominance in traditional hardware-intensive defense platforms, Leidos holds a strong position in IT modernization, cybersecurity, data analytics, and specialized systems. Leidos's emphasis on operational efficiency, driven by its technological capabilities, is reflected in its profitability metrics. For example, Leidos's Q1 2025 adjusted EBITDA margin of 14.2% compares favorably to the TTM EBITDA margins of NOC (8%), LMT (10%), GD (8%), and BAH (11%), suggesting strong operational execution and potentially more favorable contract mix or cost management. Leidos's diversification across defense, intelligence, civil, health, and commercial sectors also provides insulation from market shifts that might disproportionately affect more defense-pure-play competitors.

In specific growth pillars, Leidos leverages its technological edge to compete effectively. In cyber, the planned acquisition enhances its capabilities against specialized firms and primes with cyber divisions. In managed health services, its scale, infrastructure, provider network, and investments in AI and virtual health provide a significant moat against competitors in the veteran healthcare market, enabling it to handle increasing volumes and complexity. In Defense Systems, its rapid prototyping and production capabilities for programs like IFPC Enduring Shield and Black Arrow position it as an agile provider of affordable mass capabilities, challenging the traditional procurement models often associated with larger primes. While facing competition on individual contracts and recompetes, Leidos's strategy of focusing on differentiated technology and integrated solutions across its diverse customer base underpins its competitive positioning.

Outlook and Strategic Trajectory

Management reaffirmed its full-year 2025 guidance, signaling confidence in the company's trajectory despite acknowledging potential uncertainties in the macro environment. The guidance projects revenues between $16.9 billion and $17.3 billion, adjusted EBITDA in the mid to high 12% range, non-GAAP diluted EPS between $10.35 and $10.75, and operating cash flow of approximately $1.45 billion. This outlook anticipates a moderation in the revenue growth rate compared to the accelerated pace of 2024, reflecting the high comparative base and the typical environment of softer bookings early in a new administration's term. The midpoint of the revenue guidance implies modest growth above the Q1 run rate.

Leidos views 2025 as a "pivot year" dedicated to implementing the NorthStar 2030 strategy and investing in the growth pillars expected to drive accelerated growth beyond 2025. Key strategic initiatives are directly aligned with administration priorities, such as contributing to the next-generation air traffic control system for the FAA, supporting the Pentagon's Golden Dome multi-layer defense shield (leveraging space sensing and air/missile defense capabilities), and expanding managed health services for veterans. The robust opportunity pipeline of $226 billion, including $25 billion in proposals awaiting adjudication, underpins confidence in future awards, though the revenue impact is expected to materialize more significantly in 2026. The pending cyber acquisition, while immaterial to 2025 financials, is a concrete step in accelerating a key growth pillar.

Risks on the Horizon

While the outlook is positive, several risks warrant investor attention. Leidos remains highly dependent on U.S. government spending, making it susceptible to budget uncertainties, delays, and potential impacts from operating under continuing resolutions, such as the one currently in place through September 30, 2025. Initiatives like the Department of Government Efficiency, while potentially creating opportunities for efficiency-focused providers like Leidos, could also lead to contract cancellations or modifications. Investigations and reviews, including the ongoing SEC inquiry related to international operations and the DOJ antitrust investigation, pose potential risks of civil sanctions, monetary penalties, and reputational damage. Changes in international trade policies and geopolitical risks could affect the company's international business, which represents approximately 8% of revenues. Competition remains intense across all segments, potentially impacting win rates and margins.

Conclusion

Leidos has entered 2025 from a position of strength, marked by robust Q1 financial performance and the successful momentum built in 2024. The company is strategically positioned with its NorthStar 2030 strategy, which aligns its differentiated technological capabilities and investment focus with the evolving priorities of the U.S. government and growing market needs. While 2025 is framed as a pivot year with a potentially more moderate top-line growth rate compared to the exceptional 2024, management's reaffirmed guidance reflects confidence in sustaining profitability and investing in the growth pillars expected to drive accelerated performance in the years ahead. Leidos's ability to leverage its technological edge in areas like AI and cyber, coupled with its strong operational execution and strategic capital allocation, provides a compelling investment thesis for long-term value creation, even as it navigates the inherent uncertainties of the government contracting landscape and competitive pressures.