Greetings. Welcome to Leidos’ Third Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded. At this time, I’ll turn the conference over to Stuart Davis, from Investor Relations. Stuart, you may now begin.

Thank you, Shamali, and good morning, everyone. I'd like to welcome you to our third quarter fiscal year 2023 earnings conference call. Joining me today are Tom Bell, our CEO, and Chris Cage, our Chief Financial Officer. Today's call is being webcast on the Investor Relations portion of our website, where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call. Turning to Slide 2 of the presentation, today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, includes risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Finally, as shown on Slide 3, during the call, we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Tom Bell, who will begin on Slide 4.

Thank you, Stuart, and good morning everyone. It's really good to be with you today. I'm pleased to report another strong quarter for Leidos this morning, a quarter of record revenue, earnings, cash flow, bookings, and backlog. Revenue grew 9% year-over-year this quarter, our fastest (indiscernible) two years, and well ahead of the pace implied in our guidance. Customer demand remained robust across all three of our segments, and we are proud of the work that we accomplished with our customers to deliver on important missions. Non-GAAP EPS was up 28% year-over-year, with an adjusted EBITDA margin of 11.5%. Cash management and collections were even stronger. Operating cash flow of $795 million was already in excess of our existing full year guidance of at least $700 million. As a result of this quarter's strong performance and the momentum established in our second quarter, we are raising our 2023 financial guidance across all measures. This quarter's results and our improved outlook were driven by the substantial progress the team has made delivering on our performance initiatives articulated during our last call. First, instituting a promises made, promises kept culture here at Leidos. Second, analyzing and improving acquisition performance. Third, enhancing business development performance and backlog quality. And fourth, sharpening Leidos’ strategy. Let me speak to each of these initiatives in turn. First, we're executing well on creating a promises made, promises kept culture here at Leidos, challenging ourselves to consistently deliver on the expectations we set for ourselves, and ensuring that we're having candid conversations about what is working and what can be improved. We're taking decisive actions to reallocate resources and course correct when needed. The team understands that creating this culture is not a one and done or twice as nice event, but rather a quarter-by-quarter disciplined drumbeat. Second,…

Thank you, Tom. Despite our GAAP loss, our third quarter operating results were positive across the board, and speak to the underlying strength of the team, market position, and management discipline. Revenue growth, profitability, and cash conversion all improved not only year-over-year, but also compared to a very strong Q2. Our enhanced outlook puts us on track for an excellent 2023. Turning to Slide 5, revenues for the quarter were $3.92 billion, up 9% compared to the prior year quarter. Revenue growth has accelerated each quarter this year and was ahead of our long-term target in Q3. Growth was robust in all three of our reporting segments, especially in Health. Customers continued to expand scope on existing contracts ahead of an uncertain budget environment. Adjusted EBITDA was 451 million for the quarter, up 21% year-over-year, and adjusted EBITDA margin increased 120 basis points to 11.5%. I'll get a little more granular later, but big picture, Civil and Defense profitability were in line with the year-ago quarter, and Health was up substantially. Non-GAAP net income was $283 million, and non-GAAP diluted EPS was $2.03, both up 28% compared to last year. Below EBITDA, a lower effective tax rate added about $0.08 to EPS, which offset a $0.02 headwind from increased interest expense. Turning to the segment drivers on Slide 6, Defense Solutions revenues increased 7% year-over-year. The largest growth catalyst were in digital modernization, offensive and defensive hypersonics, and our Australian Airborne Solutions business. Defense Solutions Non-GAAP operating income margin increased 30 basis points from the prior year quarter to 8.4%, with some milestone achievements and strong cost control. That said, we did have some unfavorable EAC adjustments as we wind down prototype developments on a couple of programs, which led to the 90 basis point sequential decline in margin. As…

[Operator Instructions]. Our first question comes from the line of Matt Akers with Wells Fargo. Please proceed with your question.

Yes. Hey, good morning, guys. Thanks for the question. I guess to follow up on SES, curious if you could give us an update on some of the insourcing activities and how that's going, if you're still on track for Charleston kind of early next year.

Yes, Matt, thanks for the call and the question. Yes, definitely, the team has continued to make steady progress over the course of the last few quarters, and Charleston is really important to our future strategy. We are on track. It's something that will go live, whether it's late Q1, early Q2. We've launched our hiring campaign. We're working on outfitting the facility. So, that's still tracking to where we want it to be, and we've made other progress as it relates to various supply chain improvements over the course of the quarter. So, again, one of the reasons why the Civil margins trended up this quarter was the SES business showing some signs of improvement, and we're really happy with that progress.

I would just add, Matt, that while your question was tactical, so I wanted Chris to go first, I'm glad the first question was about SES, because while it's unfortunate we have to take the impairment charge, the fact is, we're all very bullish about the prospects of this business going forward. In fact, I referenced in my comments, changing customer buying behavior. Over in Europe at a major trade show, we recently unveiled two new products that directly speak to this changing customer buying behavior. A Pro:Vision 3 people scanner, which features wideband AI-based gender-neutral algorithms for higher quality imaging and detection, something that customers are asking for the technology to be faster and better. And more important to me, a product we call ProSight, which is a secure and scalable enterprise platform that integrates a customer's diverse suite of screening machines and operations that allow them to create a system-wide view of their security operations at any airport or any lane. So, very excited about not only the tactical decisions the team is making to right-size the business for the future, but also the forward investment in future products that will allow us to compete and win going forward in both the regulated market and the commercial market.

Great, thanks. And then I guess as a follow-up, could you touch on kind of the cash flow? I guess the Q4 cash is implied a lot weaker. Is that just kind of timing of the working capital, like you mentioned? Is there anything else kind of one-time in there.

Yes, no, Matt, nothing more than that. Obviously, we're very pleased with the third quarter performance, and that allowed us to raise our full-year guidance by the $150 million. We're navigating the risk around a shutdown and the potential challenges that may or may not pose. We're hopeful to be able to exceed that performance level. And the other thing is, we did certainly experience some benefit, as I mentioned, of customers paying a few things early as we closed out Q3. So, team’s motivated to finish the year strong, but we'll just be cautious as we navigate what our government customers do going into Q4.

Great. Thank you.

Our next question comes from the line of Bert Subin with Stifel. Please proceed with your question.

Hey, good morning, and congrats on the strong quarter. As we think about - hey, Tom, and Chris. This is probably for Chris. As we think about 3Q performance relative to future earnings, were there items in the quarter that you anticipate do not recur outside of the $14 million Health benefit you just mentioned? Your no-shutdown case for earnings in 4Q is expected to be closer to just shy of $1.80, which is still a step-down from 3Q when factoring in that benefit and the tax benefit. So, I'm just curious if there was pull-forward of security products or, something unordinary, or if the business is just performing really well.

Yes. I'd say, kind of our base outlook, Q4 looks a little bit like Q2. Bert, there wasn't anything other than the $14 million that we highlighted that was what I'd consider to be a one-timer. The Health business performed exceptionally well. When you normalize that one-time benefit out, the margins were still in the high 18% range. We did see strong performance from PACT Act's caseload. We did see strong incentive fee performance around that as well. And those are things that could moderate a little bit quarter-to-quarter. But on the contrary, I also pointed to the fact that Defense stepped back a little bit due to some EAC adjustments, and those are things that we don't expect to recur on an ongoing basis. So, Q4, hopefully, we're right down the middle. We will see where the government shutdown risk takes us, but really pleased, quite honestly, with the progress we're seeing across the business on margin and revenue growth.

Yes. Great. Maybe just as a follow-up there, both on the Health and the Defense side, I guess there's three big contracts to think about. There's DES. there's CHS-6, and there's DHMSM. Can you just give us maybe some - a viewpoint on sort of how we should think about those contracts going forward? I know DHMSM was expected to be a headwind. It doesn't seem like that's happened yet. Maybe you're repurposing some of that ceiling value. So, I'm just curious how you think those are going to - those two are going to ramp up and then DHMSM’s going to step down.

Well, let me jump in first, Bert, if you don't mind. I'll talk about DHMSM first and then we'll take them from there. Obviously, we're very, very pleased and proud of the team and how they deployed DHMSM to great customer satisfaction to date. It's about 91% deployed, with 7.3 million Conus beneficiaries out of 9.6 million that we envision full-time. And we're on track to deliver to all the DoD locations by the end of this year. But what's more exciting to me is, while most of us, and most of my first six-month conversations with analysts have been about what are we going to do when DHMSM trails off, what I learned this past quarter is, actually this program is just in the first phase of a three-phase program that the customer expects regarding the whole suite of programs around Health margins. So, what is interesting to me is how our excellent customer satisfaction and performance to date positions us not only to continue to work on the program of DHMSM, but also puts us in a great position to compete for the follow-on efforts and the rest of the efforts that the customer is looking for. So, I'm actually very excited about where we're going.

Yes. Well, I am too, Tom, and I think that this definitely has a horizon, a next horizon to it, Bert. And we've talked about trying to, once the system got deployed, add more capabilities. And to that point, the team was very successful. We won a contract this quarter, not huge, but it's a relatively shorter duration contract digital-first under the DHMSM umbrella. And that is starting on the next phase that Tom was just talking about, taking - digitalizing the information to digitalization and how patient benefits are extended and modernized. And so, that will help moderate the impact of the deployments coming to an end. It is lower in Q4 than it had been earlier this year because of the deployment phases, but we're able to see line of sight to holding kind of at the Q4 level going into 2024, which is excellent. And then quickly on the other two, DES, hey, it's performing as expected and we're seeing some ramp-up consistent with what we said last quarter. A couple of nice task orders are in the hopper right now, multi hundred-million-dollar task orders.

Well, in fact, we just got a major award this quarter of $274 million in DES, and there's likely another one even larger in the near term.

That's right. So, it will be a growth catalyst for us in 2024. And then finally CHS-6, Tom highlighted, very proud of the team to prevail without a protest. Won't see any notable activity from that in 2023, but we're positioned for it to be a growth catalyst in 2024. And too early to speculate until we get a little bit more clarity on what those task orders are, but we're rounding out the catalog. Customer seems very motivated to use us to buy as much of the C5 ISR activity as they can to support their mission. So, really excited about getting that one up and running.

Yes, and just to pile on that one, Bert, if you don't mind, so proud of the team. The RFP asked for a transition plan of 60 days. The team accomplished it in 19 days to be fully up and running for the customer in this important part of their value stream. So, just so super excited about the team that was able to lean into that and satisfy the customer quickly out of the blocks.

Super helpful. Thank you, Tom, and Chris.

Our next question comes from the line of Mariana Perez Mora with Bank of America. Please proceed with your question.

Good morning, everyone. I have two questions. First one is more like big picture. How should we think about the organizational structure in terms of timing, how long, how much it's going to cost, and how should we think about the cost structure and workforce once this is done?

Yes, thanks, Mariana. So, first of all, we will operate in the current structure through the rest of this year. So, in fact, in all of my communications to the Leidos team, I've been hammering home, stay focused, stay focused on the current organizational structure. Our customers rely on us, and I'm relying on the team to deliver on our promises this year to our customer. The new organizational structure that I articulated will take place on January 1st. And frankly, it is not a reorganization. It's simply a realignment of the existing Leidos business in a post-pandemic fresh look at the organization for efficiency and effectiveness, and that's really the main goal. How do we increase repeatability, increase our prowess going to the markets? How do we satisfy customers with better products across customers where they tended to be siloed in the last organizational construct we had? And so, it's my expectation that the new organization is going to unlock all sorts of revenue and profit opportunities. In that regard, one of the first things I'll be doing in the new year is challenging the new executive leadership team to create full potential growth plans for each of the new five businesses. And in those full potential growth plans, we'll be looking at the marketplace, the competition, the whole suite of technologies and capabilities we need to compete and win effectively. And I expect that we'll see growth plans for each business that are unlocking growth that is currently squelched or squandered in the current environment. So, I'm very hopeful about it. In terms of costs, Chris.

Less is better, but listen, that's not the primary motivation to do this, as Tom talked about. I do see each of these businesses having different objectives as it relates to that. In the example of Defense systems, hey, we have been investing and we will continue to invest more in engineering and technical depth. That is not a cost-driven exercise to get those businesses aligned effectively. But in the case of digital modernization, these repeatable solutions, this automation, obviously, those can lead to more efficient delivery structures, back-office structures, those types of things. So, we're very excited to get to the full potential, and we'll have a lot more to share on that, Mariana, as we get to that next call at Q4.

Thanks so much. And then my follow-up is more specific to healthcare. Incentive fee performance on the medical examination was strong once again. Could you please measure that for the quarter and give us a sense of how are your expectations for that too, like in the near term to come down or not?

Yes, Mariana, absolutely. This is an area where the customer's always had both incentives and disincentives associated with these contracts. And earlier this year, as the PACT Act volume was ramping up, they modified some of those. And the team has been doing an excellent job not only on throughput, volume, but customer satisfaction, timeliness, et cetera. The customer is motivated to raise the bar yet again because they want to make sure we're continuing to deliver against a high volume of demand. So, we'll continue to recalibrate on what that full potential looks like. But I would just say that we're excited about the prospect of those incentives continuing to contribute, not only in the fourth quarter, but as we look ahead in 2024.

Yes, and just if you don't mind, Mariana, me piling on, so proud of the team. And frankly, as a taxpayer, proud of the customer. The customer should be challenging us to raise our standards and raise expectations each contract. And so, they did. We performed. We - through strikes - they changed the strike zone and tightened it up a little bit. And so, I have every expectation that the team can throw strikes even better in 2024 than they did in 2023.

Thanks so much.

Our next question comes from the line of Cai von Rumohr with TD Cowen. Please proceed with your question.

Yes, terrific. Thank you very much. Great results, guys. To maybe follow up on Mariana's question, so if we take out the $14 million COVID, which was kind of prior period, you did $18.6 million, which is terrific in Health. Could you quantify how big were the incentive accords in that quarter? And give us some sense if they've tightened it up. I mean, are they going to tighten it so those margins go down? Because I think at one point, you were hoping to do mid-teens. It now looks like you're doing $18.5 million, $18.6 million this quarter. So, where's that likely to go? And what impact do you see from potential government shutdown, because you mentioned that as a potential issue going forward.

Yes, Cai, let me get going here, and if Tom wants to add on, he can. Look, we're not going to quantify the specifics around the incentives. I would just say that this year, if you look at 2023, we will not have a full year worth of those incentives in our results. So, the good news is, 2024, we expect that to be something that can contribute for a full year, but also we'll have to step up our game relative to the customer increasing the standards because we all want to make sure the veterans are being well served, that our timeliness stays high, that the throughput stays high, and the quality stays high. So, it's been a nice benefit. We have incentive fee structures across a variety of contracts, and our objective is to deliver exceptional service and try to maximize those. These ones just happen to be more noteworthy. But big picture on Health, we had previously said a mid-teens was a good margin level for the business. Obviously, we think we can do better, and we are doing better than that now. And whether that's in the 17%, 18% zone, we'll endeavor to sustain that level of performance. On the shutdown, this is an imperfect science, but we've spent a lot of work because we got so close at the end of September. Big picture we think on the order of $100 million-ish of revenue, potential risk, $10 million to $15 million of OI risk that we're managing through. I mean, the most important thing is we work hand in glove with our customers right up to the deadline, and that we work with our employees to make sure they understand what they're to do if they're unable to perform on the customer mission. And hopefully, we'll find an opportunity to get back to work quickly if it were to happen. But that's kind of our current assessment, but it's one that we will continuously refresh as we work through a write-up to a potential deadline.

But again, just to foot-stomp at a little bit, Cai, as Chris mentioned in his comments, the risk of a full 45-day shutdown is included in the lower end of our guidance. So, consistent with promises made, promises kept, given the risk of a full 45-day shutdown is possible, the guidance incorporates that risk.

I mean, the good news, Cai is, we have a lot of funded backlog. We have a lot of essential programs, and we're well positioned to navigate these headwinds.

So, just to be clear, as a follow-up, the $100 million and the $10 million to $15 million in OI, that is for Health or that is across the company?

No, no, no, across the company, Cai. As it relates to Health, that's probably one of the least impacted areas. So, that's across the company.

Veterans is an essential service.

That's right.

Okay. Thank you very much.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Good morning, guys. Thank you for the time. So, I wanted to ask about Dynetics and just how comfortable you guys feel with the development programs there, and what sort of hurdles you're looking to get through to sort of get through the development stage into production on those.

Yes, thanks Sheila, and good to speak to you again. On Dynetics, I'm convinced and we are convinced that the best days are still ahead of us. We've got a great management team down there. And as I alluded to in my comments, we're adding technical and financial expertise to Dynetics to ensure its success going forward. So, feel really good about the team and feel really good about the people who are eager to go help us find success and be successful at Dynetics and in our Defense business. The team down there is really focused on those three major markets that I have spoken to now for four, five months, which is small satellite payloads, hypersonics, and force protection. And on each of them, we are tracking, Sheila, biweekly the actual burn-down plan and the tasks that we have to hit to find success, not only as we turn the page from 2023 into 2024, but through 2024. So, we've got a complete roadmap that the team is knocking down purposefully one by one. Are there challenges? Always. Supply chain challenges, testing challenges, customer-focused challenges? There's all sorts of challenges that the team is having to wrestle to ground, but they're on it. We're engaged, both at the Pentagon and at the operational level. The customer demand for the solutions in those three spaces is acute, and frankly, world events that are happening right now only heighten their desire for these solutions that we're providing. So, we feel very good about them, and I think that Dynetics is going to benefit from being a part of this new figure Defense business in the organization of 2024, where even more broad engineering program management and technology capabilities will be brought to bear for the benefit of Dynetics and in our Huntsville teammates.

Yes, Sheila, I mean, obviously, it's a high priority item. We're putting all the right resources on it and very excited about the long-term prospects there. In any event, Dynetics will be a growing business for us in 2024. The higher, steeper ramp, the inflection point on related to IFPC moving to fuller volumes could be later in the year, could trend to 2025. But all signs point to that continuing to be the capability the Army's focused on deploying.

Okay. I'll follow up on that later, but on the backlog, Tom, I wanted to ask about this since you mentioned it in your prepared remarks. I think you said it grew $4 billion, and the last time we chatted, you mentioned you added a criteria about EBITDA margins to potential wins. So, can you talk about how you think EBITDA margins should be on some of these new wins that you have in the pipeline now?

Well, you're right, Sheila. What I am doing as we talk about the pipeline for business development opportunities across all the businesses is, we're adding the criteria of, well, what is the expected margin? And that's why in my comment, I talked about not only the increase in the backlog, but that increase supporting our margin and cash expectations for Leidos. So, you could assume that the general health of the pipeline has increased in - has been accretive in the margin potential, and is very much on track with helping us stay a very profitable, cash-accretive business in the future.

Great. Thank you.

Our next question comes from the line of Tobey Sommer with Truist. Please proceed with your questions.

Yes. Good morning, this is Jack Wilson on vent, Tobey. Could you dig down a little bit more into that reallocation of business development resources sort of in light of pursuing that higher margin work?

Sure. I mean, it's not really rocket science. It's simply looking at the pipeline, Jack, and making sure that where we are spending the talents of our people are on the opportunities with the highest P win and the highest benefit to Leidos. It was that each business area in Leidos was given a general growth target, which was generally the same for each businesses, and that's not my philosophy. My philosophy is, we're running one company called Leidos. We're trying to grow the topline and bottom line of Leidos. And as opportunities ebb and flow between the five businesses that we have today, or the five businesses that we'll have in 2024, the key is that we aggregate business development resources and talent to those areas that are going to have the biggest bang for the buck. And so, that's really all it is. Instead of trading resources chasing low margin work, because each business was incentivized to grow no matter what, I am interested in growing Leidos as a whole. And sometimes that means some businesses will grow disproportionately to others. Chris kind of touched on this a little bit. In the future, not all five businesses for Leidos will have the same topline and bottom-line goals. I'll be measuring those and putting them out there for the team, commensurate with the market that they're in, the potential of that market, and the competitions and the opportunities that present themselves in that market for the next year, two years, three years, four years. And that's the whole philosophy of redeploying the business development time and talent to those areas of greatest return for Leidos, therefore, our customers, and by extension our shareholders.

Thank you very much.

Our next question comes from the line of Seth Seifman with J.P. Morgan. Please proceed with your question.

Hey thanks very much and good morning, everyone. Just maybe to follow up a little bit on that question about relative growth rates and kind of the new sectors that you laid out. Not expecting any kind of numerical targets or anything like that, but just in a relative sense, how should we think about the growth rates in those different sectors that you laid out relative to each other and also how it fits in, Tom, with your internal capital deployment plans?

Yes, thank you, Seth. Great question, and you're right. I'm not going to get to specifics because frankly, we don't have them yet, but I have hypotheses. And so, the hypotheses is, if you look at the five businesses, some of them are positioned for topline growth because of customer demand and interest in solutions that they can provide. Other businesses, we're going to be calling them sectors going forward, they are more and aggregation of programs so as to bring better bottom-line results. My hope is that in time, each business over time, over five, six years, topline growth and bottom-line growth may be countercyclical in businesses, but that doesn't mean I ever think any business is not also a topline growth story, and also a bottom-line growth story. So, we'll be using 2024 to have a very purposeful strategic planning exercise around, what is the full potential of each business? Where are they in the customer's ecosystem? How does the customer's buying behaviors, how do we predict they'll unfold in the coming year? And therefore, what are the goals and objectives for that business in the near term and the long term? And business development resources, technology resources, will be deployed according to those plans. It's simply going to be, the money is going to follow the plans that have survived the scrutiny of the strategic planning process, and therefore have the most merit for investment of our capital. That's it in a nutshell. And as Chris suggested, we're excited about 2024 and going through that strategic planning process and sharing more results with you over time as those come to fruition.

Great. Thanks, Tom. Thanks very much. And maybe just for a quick follow-up, a little more model-focused. As we think out and we think about uses of cash and capital deployment other than - I would assume that there would be an intention to repay the $500 million that's due in 2025, just given that it's a pretty low coupon and would probably need to be replaced with something higher. And other than that, should we think about the potential for most cash to be returned?

Yes, I mean, big picture, Seth, I think you're thinking of it right. We hit our leverage target. We're happy with where we are. The interest rate environment could be vastly different in 2025. So, that's something we'll pay close attention to, but I think you've got it right. We've got a dividend program. Tom just talked about an increase that uses a little over $200 million a year of cash, a CapEx program at around 1% to 1.5% of revenue. And then we've got a lot of excess cash that we’ll generate, not only in the fourth quarter, but next year. Delevering further at this time is not a priority, but it's always something we'll evaluate relative to the interest rate environment much.

It'd be a nice problem to have.

Thank you.

Our next question comes from the line of Louie DiPalma with William Blair. Please proceed with your question.

Tom, Chris, and Stuart, good morning. Within healthcare, you referenced how DHMSM could be stable going into 2024. How should we think about the VA healthcare exam volumes going forward with the tailwind of the PACT Act? And has there been any changes in the competitive dynamic there?

Yes. Hey, Louie. Again, just a clarification on DHMSM, stable relative to our Q4 kind of exit rate, right? It'll be - it's been trending a little lower as deployments have ramped down, but the good news is we, at this time, don't see a significant of a step-down in 2024 as we once did. So, that's great news. On the VA side, listen, I mean you always have competitors that are highly motivated to ensure they are stepping up their game to capture as much of the allocation as possible. And the VA wants a robust competitive dynamic because we need to keep the throughput high and give veterans the benefits that they deserve. At this time, it's hard to predict 2024. we'll have more color in a few months, but we see that stable and it's been a growing part of the portfolio. And there's other good things going on in the VA too. The RHRP program - sorry, in Health, the RHRP program will continue to be a growth catalyst for us as well. So, it's not just the PACT Act volume, but right now that's trending very favorably, and we're very pleased with the performance of the Health leadership team and really delivering great results.

Excellent. Thanks.

Thank you. Shamali, looks like we have time for just about one more question.

Sure, no problem. And our last question comes from the line of Ken Herbert with RBC Capital Markets. Please proceed with your question.

Yes, good morning, Tom, and Chris, and Stuart. Thanks for squeezing me in. Hey Tom, maybe just to take a step back, I appreciate all the details you've outlined here in terms of the sharper focus, and obviously reflected in the backlog and the wins and everything else. But as you think about the business now transitioning into 2024, what do you think are the biggest opportunities from a cost standpoint as we think about sort of the margin opportunity? Obviously, not looking for specifics in guidance, but how much of a cost standpoint do we think there is in the business, which obviously should support what you're doing in terms of the higher quality bids and business opportunities?

Yes, well, I can't put a number on it because we're only now at the point where we can start to imagine the opportunities that are in front of us. But I'll call your attention to the three functional leaders that I talked about enhancing their positions. First and foremost, the Chief Technology Officer. Bringing LinC into our Chief Technology officer is going to help us become more efficient and more effective at creating and deploying technologies for the benefit of all of our businesses. I am really excited about focusing our R&D pipeline on those areas of technology that will propel our current business, enable us to compete and win and insert technology in those businesses, and win new businesses going forward. So, I think there's great opportunity for us in the CTO office. In the CPO office, the Chief Performance Officer, that is the internal wheelhouse of everything that makes Leidos an efficient, effective corporation. I mentioned real estate, procurement, IT, program management, are all going to be in that. The new leader of our Chief Performance Officer will have the responsibility to not only make sure we are best-in-class when it comes to the quality of the product we put on the field to make Leidos as effective as possible, but I'll also be asking that individual to ensure we are world class as a cost of doing business at the corporate level. And then last but not least, aggregating the complete value stream of growth, strategy, sales, marketing, communications, government relations, all in the Chief Growth Officer, will put us in a prime position to ensure we have unparalleled customer understanding for where the customer's going and how we're going to skate to the puck of where it's going to be, as opposed to just chasing RFPs. So, the net sum of all of that, Ken, I believe will make us a more efficient and effective corporation. But again, as Chris said, it’s not - this isn't a cost-cutting exercise, this realignment. This is aggregate the capabilities of Leidos in a better way to make us more effective and efficient.

Yes, and I'd only say, I mean, we're already seeing and feeling kind of a leaner ongoing operating environment now, and that's showing up in our results. Clearly, we are focused on next year's 10.5% plus margin target. That's an area that I think we're demonstrating that we have line of sight to delivering on that. And that's still a goal the corporation's rallying behind.

Great. I'll leave it there. Thanks for the color and nice quarter.

And this concludes our question-and-answer session. I would now like to turn the conference back to Stuart Davis for any closing remarks.

Well, thank you, Shamali, for your assistance on this morning's call, and thank you all for your interest in Leidos this morning. We look forward to updating you again soon. Have a great day.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.