Leidos Pricing Spineometer: 5 of 5 Vertebrae

Leidos, a software and technology services and solutions company supporting infrastructure and security for government and commercial entities, had a positive FY 2024. Revenue rose 8% to $16.7 billion, and operating profits rose 194% to $1.8 billion over last year.

A review of Leidos’ 24 February earnings call and annual report provided insight regarding the importance of pricing on performance.

FACTS FROM EARNINGS CALL AND ANNUAL REPORT

Leidos operates with four reportable segments. (1) National Security & Digital offers defense and intelligence customers services and solutions in cyber, logistics, security operations, and decision analytics. (2) Health & Civil offers federal and commercial customers services and solutions for improving public health, care coordination, life and environmental sciences, and transportation. (3) Commercial & International serves utilities, government agencies, airports, and ports with services and solutions for securing national assets, modernizing energy and critical infrastructure, and enhancing mission outcomes. (4) Defense Systems serves U.S. defense agencies with rapid prototyping and advanced hardware, software, and integrated solutions.

Their dominant customer is the U.S. government. They also serve the United Kingdom, Australia, and some commercial entities.

Most of the services and solutions are sold as contracts with varying contract payment arrangements (Cost-reimbursement, Fixed Price, Time & Materials, etc). Recently, they have emphasized contracting on a Fixed Price basis to improve their profit opportunities at a higher risk.

VALUE-BASED PRICING FRAMEWORK IMPLIED PRICING REQUIREMENTS

Out of 48,000 employees, industry benchmarks suggest 30 to 150 professionals would be primarily engaged in pricing.

1. Most of Leidos’ revenue is generated from contracts. These contracts require strong cost estimation capabilities, and pricing would be highly dependent on the contract type.
2. Some contracts, such as Indefinite Delivery / Indefinite Quantity (IDIQ) contracts, are fulfilled over many years. While Leidos reports embedding modest incremental cost increases year over year, Index-Based Pricing using the Consumer Price Index or the Producer Price Index may be a more reliable approach for profit resilience.
3. Fixed-price contracts are inherently risky, and the pricing of these contracts would create the opportunity to quantify that risk in contracting. Often, service firms will demand a 20% or higher premium for fixed-price contracts to finance that risk. Even then, strict change-order control is necessary to ensure the delivery of services is profitable.
4. Other issues, such as macroeconomic factors, geopolitical risk, and simply governmental budget risk, increase the complexity in pricing.

OBSERVED PRICING CAPABILITY

Research into the investment by Leidos in pricing yielded surprisingly encouraging results.

1. The number of pricing professionals at Leidos was well within industry norms
2. Roles ranged from analyst, manager, and director to include a vice president.
3. Responsibilities were largely focused on cost estimation and pricing proposals.

Given the importance and capability of pricing at Leidos as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of May 2025.

Leidos Pricing Spineometer: 5 out of 5 Vertebrae.

LDOS (Leidos Holdings, Inc.) rose from 127 the day prior to their 24 February earnings call to 129 one week later. FY 2024 revenue of $16.7 billion with an 11% operating margin and P/E ratio near 14.

For FY 2024, a 1% improvement in price would yield a 9% improvement in operating profits, holding all else constant at Leidos.

SIGNY by Wiglaf Pricing, an AI tool for multi-SKU businesses to predict and manage price capture, has launched. Contact me at tsmith@wiglafpricing.com