Glad to have Tom Bell, CEO of Leidos, with us today. My name is Sameer Garg. I sit within our investment banking and run our global aerospace and defense practice. Tom, maybe we can kick off with what you're seeing in the markets, any opening remarks you'd like to make around the strategy of the company, and then we'll dive into some of the key themes you wanna highlight.
Great. Thank you, Sameer, and thank you all for joining us today. It's a pleasure to speak to you all. In terms of opening comments, let me just say it's a pleasure to be back at the Citi conference. I was here two years ago, fresh off the back of the Munich Security Conference, and a lot was changing then. Never did I envision, though, two years ago, that I'd be back two years later, and still a lot was changing. So a lot is going on in the dynamic environment in which we operate, and that is creating a tremendous amount of opportunities that we at Leidos are very, very excited about.
I n terms of opening comments, to kind of frame the company, obviously, Leidos, for all of you that know, is a $17.5 billion -$18 billion company, with 48,000 Leidosians, where we primarily serve the U.S. government, in the federal IT space, national security, and, the intelligence community, health, veterans health also. And we have a major presence in Australia and the U.K. So, very excited about the business we were able to run through 2025. I think Sameer will probably talk more about 2025.
But despite headwinds in 2025, we announced record earnings, record cash, and record profit, revenue. We're excited about not only the trajectory of the business, but the clarity of the strategy we've laid out for how we're gonna grow this business. I think that's something that, in the past, perhaps we didn't do a good job articulating, and now we are very keen to be very clear and transparent about our growth strategy, and explain why that makes us a good bet in the environment in which we find ourselves.
So with that as my opening comments, over to you.
Yeah. Let's dive into it. So over the course of the day, we've talked about the key megatrends that are underpinning the tailwinds we see within the broader defense and government markets. So if you could maybe talk us through the business lines within Leidos, and what are those megatrends, and how are you benefiting across those within your business lines? That'd be a good place to start, maybe.
Thanks, Sameer. Yes, for people who haven't had a chance, because they've been here, to catch up with our earnings call yesterday, I announced on that earnings call yesterday a renaming and a slight reorientation of the five sectors in which we run Leidos, and so I'll run through them and their new names now. First and foremost, we have our digital modernization business that remains the core of the core of what this business has always been, run by Steve Hull. Next, we have our defense business, which we've aggregated all the defense products that used to be spread out, both in defense and in our national security business, into one defense sector. That's run by Cindy Gruensfelder. We now have a homeland business, specifically called Homeland.
That's where our Australia, U.K., energy, and our DHS and Department of Transportation work happens. So think of everything about defending the homeland, no matter what homeland you're speaking of. Next, we have our health business, which obviously, is a mainstay of us, led by Liz Porter, and one that we are also, intent to grow with. And last but not least, certainly not least, is our intelligence business, that used to be housed in our national security business, but we've cleared some of the, non-intelligence community business out of that sector so that we have a clear line of sight about how we serve our intelligence community as effectively as possible in a specific focused areas. So, intel, health, defense, homeland, and, intelligence. Thank you.
Great. Great. So as we then think about the how these markets are positioned, obviously, a lot of tailwinds across 2025, 2026. We're yet to see the 2026 President's Budget to be released, but what are you expecting to see, and how does that impact some of the business lines that you mentioned?
Yeah. So two aspects to that, that I'll take your question and take liberty with. First is the Department of Defense budget itself. Obviously, there's lots of talk in Washington, D.C., about that eclipsing $1 trillion in the 2027 budget, but also perhaps trending toward $1.5 trillion. We remain, you know, it remains to be seen where that dust settles, but regardless, that is a bigger budget for the Department of Defense, and we expect it will grow. So our defense business, which again, is all the aggregations of how we serve the Department of Defense, except for digital modernization, stands to benefit from that. Obviously, we have two growth pillars in that business now.
We've announced that maritime and space were two engines that we expected to grow our defense growth pillar through, and we have many, several programs of record in those two areas that we look forward to advancing with a bigger budget. Outside the Department of War, though, we also see a lot of money flowing to the agencies that we serve from the one big, beautiful bill. Remember the reconciliation package in 2025, and the budget that flowed to agencies as a result of that? Think TSA modernization, think FAA modernization. And we're waiting for those customers to start spending that money in line with the priorities that this administration has laid out. Again, FAA modernization, TSA modernization.
Again, while energy is our growth pillar within our homeland sector, we're being opportunistic about where we serve this nation from an air traffic control standpoint and an airport modernization standpoint, to make sure that as this customer wants to lean into those problems that we would all agree are vexing problems that this nation needs to solve, we're there to help them service that.
Excellent.
The intel community is also an area of budget growth for this administration. They do want the intelligence community to be more adroit at making sure our government is the smartest government on the face of the earth. And so we're expecting to be a big part of that with our focused line of effort around our intelligence business. Then you move over into digital modernization, and I think we'll probably, Sameer, talk a little bit about AI and that whole world of digital modernization. But as a preamble to that, we think that digital modernization is not a dinosaur, but rather a growth pillar for us, and so we do expect to exploit AI to help grow that business.
Last but not least, our long-term presence in the health business, where we've been a major service to our veterans in the United States, and to the active service members and their families, in providing multifaceted health benefits, exams, multifaceted services, to help make sure that our fighting force is fit for service and that our veterans are well taken care of. In each of those five sectors, we have one growth pillar each. It is purposely organized in that regard. We had been operating in a capabilities-based organization, which helped us improve our profitability to the 14.1% that we printed last year. Now we've refined that to be much more focused on top-line growth and revenue growth, and that's where the form follows function of the strategy.
Great. Before we get into some of the results and the outlook side of things, 2025, certainly a very, eventful year for a variety of reasons, given DOGE, government shutdown, et cetera. Maybe a couple of questions around that. One, as you think about 2026 on forward, what do you think is the legacy of DOGE, for companies that are more service-focused, more labor-focused? Thoughts on that?
Yeah. Thank you. Yeah. Certainly, 12 months ago, DOGE was the thing sucking all the oxygen out of the room, and yet, we didn't see it as the inherent threat that some others saw it as. We saw it as an opportunity. We had an administration come in who was talking about: "How do I make government services faster, more efficient, and more effective?" And, you know, frankly, what American would argue against that? Who doesn't want government services to be faster, more effective, and more efficient?
So, we leaned into it, and we actually went proactively to DOGE and spoke about opportunities we had been seeing for years because of our privileged position as a valued contractor with the federal government, to say, "Look, here's a catalog of ideas about how to make the government faster and more efficient." And, as a result of that, we had a very productive dialogue with DOGE early in the year. Now, obviously, there were some fits and starts there, and net-net, the general business did suffer some hits. But every time there was a contract that was canceled or something put on--
Remember the wall of receipts. We also used that as an opportunity to say, "Now, let's talk about how we do better." And as a result, very proud of Steve and the team and how they navigated that year. DOGE still exists as a fundamental foundation in this administration. While DOGE has gone away, the people have been picked up by the various administrations, and again, we're maintaining those relationships with them in that capacity, and maintaining our relationship with cabinet-level secretaries to say, "How do we make your department better, more efficient, and more effective at providing the services you're set up to do?" So, DOGE came and went, but the spirit of DOGE lives on.
Lives on. Great. 2025, 2026 also saw the government take economic stakes in critical industries, including defense. I know you alluded to the theme of partnerships and co-investments with your customers on the earnings call. Talk to us a bit about what type of opportunities are these, why now, and what does Leidos uniquely bring to the table, relative to your peers?
You know, the conversations that occur from time to time in the government about taking ownership positions, I choose to look past the headline and understand the why they feel this way. And the why is always because they have a passion for what that industry provides or the capabilities that they think are critical for our national security. And that national security can be very wide, from chips to steel to defense companies. For us, the conversations have become very active around how we can help the Department of War, how we can help this administration secure the borders, make air travel safer, and make our Department of War more effective at what they need to do against threats that, Sameer, are not new or not something that this administration invented.
They've been discussed in national security strategies for the better part of a decade. This administration is just very animated to actually do something about it and get to done in the coming years, not the next decade. So yes, we're very excited to not only be talking about getting behind growth we've always envisioned, programs like IFPC or Wide Field of View. These are programs that we always knew were gonna ramp up, but now there's added momentum behind ramping them up to the levels we always expected. But then also other areas, new areas that we didn't expect there to be a demand signal for, which are adjacent to businesses we have proven prowess in.
So we're actively engaged with conversations. We're not at liberty right now, Sameer, to announce any of them, because we don't want to get ahead of the Department of War, but there's exciting opportunities, as I said yesterday on our earnings call, for new franchise programs for Leidos, and for us, that's a very exciting probability.
Great. So that's a good segue into the results and outlook. We'll touch upon that on a couple of topics. I guess looking at the past year or so, we've seen a clear bifurcation in performance across your peers, and there is a little bit of folks or a class of folks who are performing materially better than others. You touched upon DOGE and how you welcome that opportunity to be more efficient, et cetera. Can we maybe double-click a little bit on what other things are you doing? And somewhat related to that is the question; we can—you can choose to answer it now, around the R&D investments that you're making within the company.
Sure. Well, first of all, the separation that occurred in 2025, I think was a manifestation and a recognition that Leidos is a different company. It is a different company and a peer group that's conveniently most of you track it over here as a federal services and IT company. I understand that because a part of our business is that, and that is the heritage from which we came. But that ignores the movement over the last decade of how we've moved this company to be a much more multifaceted service of federal governments, federal products, and federal IT, up the value stream, if you will.
So, I think one of the things that got recognized in 2025, and we're looking forward to continuing to discuss in 2026 and 2027, is not only the digital modernization business, which is that federal IT business that we're mostly categorized as, and we don't see that again as a dinosaur, that's yesterday's news. We think we can lean into growing that, but a defense tech company with all the promise that one of the private equity-backed startups has, but also with a track record of being able to deliver the technologies to our war fighters. This is something that the Department of Defense recognizes and is very excited about, and that's why we have this privileged position to be in conversations with them around these framework agreements.
We look forward to leaning into our intelligence chops, because, as you can appreciate, we don't do IT in those agencies. We do real mission software and real multifaceted, full-spectrum cyber effects for our government, something that this administration is talking very publicly about, the need for this country to have full-spectrum cyber. So the Kudu acquisition we did last year and our cyber growth pillar anticipated that that was a need that this nation was going to have to get behind. So we're very excited about that. Our health business, as I said before, this is a multifaceted, not only in the Department of War and the Department, the Veterans Administration, but also in other agencies where we do fit-for-service exams for service members, think the Secret Service.
And we're looking forward to growing that business because we really very much expect that that's the future. And then, again, Homeland. Homeland is the number one talking point of this administration. Has been, I expect, will continue to be. And so, again, we're in a privileged position where we serve the Department of Homeland Security and the Department of Transportation in making sure that our nation is secure, and our energy growth pillar fits very well in that, because our energy infrastructure is one of our vulnerabilities. If you are somebody who wishes ill on America, you're going to look to disrupt our energy infrastructure.
And so our energy play is not only to better serve the public utilities around America, but also bring the tools and techniques we know they'll need to make them more resilient, more cyber secure, and more effective to withstand any future scenario.
Great. And just to follow up on the R&D side, so 2023 to 2024, Leidos spent about 17% on the internals, the company-funded R&D.
Yes.
That number accelerated to 24% in the past year or so. Talk to us a little bit about the kinds of initiatives. Obviously, you have to be careful about prioritizing, as you mentioned. What are the types of initiatives, and more importantly, as you think about return on this invested capital, how do you think about measuring those?
Well, I appreciate you doing the math to go back in time and figure those things out, Sameer, because it highlights an important point. We haven't reacted to an EO that says, "Thou shalt spend more money on your capabilities." This is part of a plan that Chris and I have put in place over the last three years to position this company for the environment we saw occurring, regardless of who the president was going to be in 2026 and 2027. And so we've been increasing our internal R&D to make sure that we remain a technology-based services provider, a technology-based provider of solutions to our customers. What you didn't say, and which is also true, is our CapEx is growing 3x from last year to this year.
Again, not in reaction to an EO that says, "Spend more of your own money," but a natural manifestation of our putting ourselves in a place that we want programs of record. We wanna be in a place where we have secure SCIFs, compartmentalized facilities for customers to do the work that can only happen in SCIFs of a certain certification level. And, again, matching our R&D so that we have the internal capability that is the, the golden bolt around which our solutions are built. And so, yes, we'll spend more money this year. At the same time, we don't see that as a, a new plateau for, for Leidos. It, it is a purposeful mountain we've come up to, and now we're here.
We don't expect that to maintain for the years to come, but we're very happy that we're in this place to spend this money to make sure that we're the company our customers need us to be.
Great. Maybe moving towards the energy side of the house. Obviously, congrats on the ENTRUST acquisition. It's an exciting way to play the AI infrastructure, as well as the energy upstream value chain. The business, however, as you mentioned, sits within the homeland- the homeland business line now. Still somewhat subscale relative to other business lines. So from your perspective, as you highlight it to be a growth pillar, should we be expecting more M&A there? Is it the organic growth strategy that you want to continue to see play out? How should we be thinking about that?
Thanks, Sameer. Yeah, I don't think of it as subscale in the Leidos terms, because how big a business is within Leidos is interesting but not really important to me. What's more important to me is, are they at scale in the competitive market space, right? And so the thing about our ENTRUST acquisition, when we close the deal and we combine these two companies, we'll be about a $1.3 billion , $1.3 billion+ business, and that puts us in the top three of these energy engineering companies in the United States. When you combine that with the efficiency we expect to be able to put into ENTRUST when it comes to AI engineering tools we've built and delivered into our engineers, we think we're gonna have the 3,000 new Leidosians that come to us with the ENTRUST deal, more efficient, more effective, and able to organically grow this business. That's our playbook for now.
In keeping with what I've said publicly in the past, I believe in digesting what's on your plate before you take another serving of mashed potatoes. And so we're gonna be digesting this. We're gonna be integrating it effectively. We proved to ourselves in 2025 that we could integrate a company very quickly. We did that with our Kudu acquisition. We got to done by the end of the year, and so we're very excited about our muscle memory of how to integrate something fast and deliver benefits from it for the rest of the enterprise. We plan to integrate EnTrust as quickly as possible and get to done, and then get their efficiency up, pay off the debt, bring our, our balance sheet back to, well below our target ratio number, and then, see where we go from there.
Great. Maybe moving towards the defense system side of the house, where, as you mentioned, a lot of the products have now been consolidated. So the NorthStar 2030 strategy is somewhat absent on the aerial unmanned and counter unmanned side of things, but we have heard the company talk about the autonomous capabilities and everything related to it, with whether it's on the maritime side, et cetera. So can you walk us through how Leidos thinks about this unmanned domain, just given the relevance within the current administration?
Yeah, sure. And it's the danger of having growth pillars. Certain people feel excluded from it.
Yep.
So let's go back and revisit what these growth pillars represent for us. What we said was we identified these five growth pillars where we had a differentiated technology, and we knew we could make very good money at doing it, serving that market, and it was a market that was growing and based on enduring needs. So that's how we picked the five growth pillars we have today. But we also said, because the team has done such an excellent job in 2023, 2024, and 2025 of proving the profitability of the portfolio of Leidos, again, last year, 14.1% that we're very proud of, that gives us the opportunity that this is an and strategy.
It's not that I'm not investing in here in order to differentially invest in my growth pillars, it's that I can continue to invest at the base level in everything that I've been involved in. It's just that these five areas demand increased investment. So something like UAS and counter UAS maintains its level of investment as customer pull comes in those areas, and we are seeing some customer pull in those areas. We're happy to fund it as part of the and strategy of we want everything to rise, and nothing's being diminished, everything's coming up. So, I think we also, Sameer, announced, you know, a part of that on our earnings call yesterday, where I talked about our ALPS and Morata systems that are, at its core, manned, unmanned, and cruise missile defense systems in a passive setting.
So very excited about the opportunities for us to continue to lean in there. There is a demand signal, especially in 2026, with the Semiquincentennial of America and the World Cup events around the nation, that sadly are also going to be high security issues. And so we look forward to partnering with our customers to make sure that we make sure the public is safe and secure at all those events.
That's great. Looking at the clock, I know we have about 13 minutes or so. Maybe we'll switch the conversation a little bit to, which you alluded to earlier on the AI side of things. So, clearly, the narrative around disruption from AI continues to gain pace. There's all kinds of research talking about, obviously, the benefits, but certainly the disruption that comes from adopting AI at the pace that it is getting adopted. So maybe a good place to start is, what has been Leidos' or overall AI strategy, and within that, if you could touch upon your partnership with OpenAI?
Sure. Thank you. So, you know, AI is not new to Leidos. You know, depending on what you consider AI, we've been at it for decades. but certainly, seriously, for many years. It has, you know, jumped onto the public consciousness with, you know, ChatGPT and everybody getting one on their phone. And certainly, there is a lot of conversation around now what it's going to do to the work and what markets is it going to disrupt. But we aren't caught up in a hurricane here. We've been looking at this, making sure we're adroit at exploiting AI for years. Last year, we took the step to talk internally about being an AI-first company, that AI was going to have to be a part of everything we did and every solution we put forward to our customers.
So we started talking internally about it being the latest commercial technology that we would exploit. Not a threat. Our whole business model is built on taking commercial technologies and making them work for our customers. We think AI is that latest thing. To follow that up, last year, we actually deployed OpenAI on every desktop for Leidos, for every Leidosian. Not every. Some people in classified space can't do it, but most Leidosians have access to OpenAI. We put this on people's desktops, and we said, "Play. Get familiar with it." You know, not on your phone, silly play, but now play with it in terms of how you make your business processes better, faster, and cheaper. We defanged it a little bit last year, and this year, again, yesterday, I announced that I've stood up an enterprise transformation office internal to Leidos.
The intent here, Will Johnson will be leading that for me, is that he will bring all of this together now. Now, we've got a whole bunch of, you know, chickens running, everybody playing with AI. Now, we're gonna collect that all back in and go through a very purposeful way to say: How do we combine the power of AI, the power of technology, with business process reengineering to make Leidos and the overhead of Leidos far more efficient, far more effective, so that we can take more Leidosians from the back office and put them closer to the customer.
Very excited about this and very, very excited about the promise that that holds for us, not only in now reducing the cost of running Leidos, much to Chris, Chris's pleasure, but also, how we're going to prototype, how AI can transform our customers' business operations for them. So we're treating ourselves as customer zero in this regard. Let's do it to us. Let's learn about how we can make our processes better, faster, cheaper, and then turn those tools over to our digital modernization business and say, "Now go forward and help our customers, help the government be better, faster, cheaper." Which is kind of full circle to your first question, Sameer, because that's what DOGE started with. How do I make the federal government faster and more efficient, smarter and more effective?
That's what we plan to do to ourselves, and then take those tools through our Dig Mod business into our customer communities and say, "We can do this with you, too." And that's very exciting for me. I just don't see AI as the threat that others see it. I see it as the next commercial technology that we are called to exploit.
And so within that, if we sort of follow through on that thread, as you think about your customer base, and certainly fairly diversified customer base. Any customers that jump out to you that have been early adopters of AI, and consequently, those that may be somewhat insulated from it?
The department, cabinet-level department that gets the most press about deploying AI is the Department of War. And yet, again, I think they're at the same point in the journey I was a year and a half, two years ago, which is deploy it onto the desktops in the Pentagon to let Sameer play with it and figure out how to make it make your job better. But I don't think it's yet to the point where it's doing more than that. It's going to be more at the, you know, create an app that tells me, when I come in in the morning, pulls these three data sets down and gives me a situation summary on something, for instance.
Got it. Okay, that makes sense.
Very tactical. It's gonna be very tactical. It's not systematic.
I guess, as you-- when you think about going from 2025 to 2026, this is now back into the internal Leidos side of things, what does that enterprise enterprise transformation look like, and, and how do you operationalize that for customers?
Yeah. Well, the first thing is, the charge for our enterprise transformation office is to go out of business. Get it done fast and be done, because I don't think this is a sustaining part of the company. So, I'm really excited about the opportunity to exploit this fast. There are obviously business processes that are clearly complicated and need business process reengineering, and I'm very excited about the fact that instead of a Kaizen event with multiple black belts and big white boards and hundreds of peoples for weeks trying to map the process out, we can use these tools to help us understand the process better and understand what better looks like faster, and then deploy them to the bottom line of the company so that we can actually improve our results this year.
That means by the end of this year, next year, those tools, those successes, are now proof points for our DigMod business to take to our customers, or for any of our, businesses to take to their customers and say, "We can help you do this, for your operations also.
And so within that, what data points should investors be looking at when they think about the AI strategy being deployed at Leidos? We had Chris Scalia, CFO of RTX, talk about how they're starting to see growth at an elevated level while the head count has stayed the same, and that's one way the core program has been working. Any data points or perhaps if it's too premature that's fine, but anything that we could be keeping an eye out for?
Sure, Sameer. Well, the first thing that brought this issue to light for Chris and I was the fact that, you know, if you look back at history, our revenue growth and head count growth was pretty one-to-one correlated. As Leidos grew, head count grew with it. The first thing, and this was years ago, we started to talk about is, "Hey, that's unsustainable," because there's a war for talent. Remember when we used to talk about the war for talent? There's a war for talent, and, you know, if every new dollar of revenue requires X amount of a belly button to come to Leidos, this is unsustainable. We can't find enough smart people. We started talking about, how do we bend that curve? Which is kind of what I hear you saying Chris was talking about.
How do we grow revenue without growing head count? Then that morphed, you know, frankly, into, well, maybe bending the curve isn't ambitious enough. Maybe what we have to do is crush the curve. The curve isn't overall head count now, but it is back office head count. It is running the business head count. Because what I'm very excited about is, you know, Leidosians want to come to serve customers, and we are a better company when more of our employees are closer to the customer, closer to the point of need, closer to, you know, have that frontline obsession of the customer. So over time, when successful this year, I think our attrition rate will be what our attrition rate is, but you'll start to see our head count to revenue change, and you'll see our back office to front office also change, and those are two things that I'm gonna be measuring.
Great. On the software development side, obviously it seems like, again, the market seemed to be perhaps over-indexing, but anything on the software development side seems to have a target on its back. How is Leidos leveraging that paradigm shift to be an effective partner to their customers?
Yeah, thanks. Yes, it is, we are caught up in a storm, where many industrials are, and so people are waiting, kind of like you talked about, separating who's a winner and who's not a winner in this environment. I think that same dynamic is happening now. I think what our customers are looking for is exactly what I described, which is people who are not afraid of this or trying to deny this, but are leaning into it and saying, "Now I wanna work with you to exploit it." Because you just can't take a suite of tools, put them on a desk and say, uh, "Make it work." W e still are dealing with highly complicated business systems in our customer communities, just like Leidos is highly complicated.
To the degree we're successful doing that for ourselves in a complicated business environment, we'll be able to translate that to our customers and help them understand our ability to do that for them. Then we're at the point where then we can help them build software and build systems that make their employees more effective and more efficient.
Great. I see we're just out of time, so, maybe I'll yield the floor to you to make any closing remarks, and, and then we'll close out.
Thank you. Well, I'll end with where I started, which is to thank Citi for hosting this today, and thank you for your time in this fireside chat. I am tremendously bullish, of course, you would expect me to be, about the trajectory of the business. I think 2025 lays a foundation. Our growth pillars are clear. The execution engine that we've got running in Leidos right now is humming. You know, Chris talks about write-ups versus write-downs, and we're setting records for how we are writing up performance on contracts as opposed to down. That's a symptom of a well-run company that is firing on all cylinders.
You match the trajectory we have for our growth pillars with the unexpected growth that we can see now in areas, like I mentioned, the framework agreements, the TSA modernization, the FAA modernization. And I'm just excited that 2026 is going to be another exceptional year for Leidos, leading to exceptional years to come.