Defense contractor Leidos (NYSE: LDOS) missed Wall Street’s revenue expectations in Q3 2026 as sales rose 3.6% year on year to $4.63 billion. The company’s full-year revenue guidance of $18.1 billion at the midpoint came in 1.2% below analysts’ estimates. Its non-GAAP profit of $3.62 per share was 19.4% above analysts’ consensus estimates.
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Leidos (LDOS) Q3 2026 highlights:
- Revenue $4.63 billion vs S&P analysts’ estimates of $4.73 billion (3.6% year-on-year growth, 2.1% miss)
- Adjusted EPS $3.62 vs S&P analysts’ estimates of $3.03 (19.4% beat)
- Adjusted EBITDA $644 million vs analyst estimates of $619.8 million (13.9% margin, 3.9% beat)
- Revenue guidance The company dropped its revenue guidance for the full year to $18.1 billion at the midpoint from $18.3 billion, a 1.1% decrease
- Adjusted EPS guidance Management raised its full-year adjusted EPS guidance to $12.60 at the midpoint, a 2% increase
- Operating margin 11.9%, in line with the same quarter last year
- Backlog $49.55 billion at quarter end, up 4% year on year
- Market capitalization $16.91 billion
StockStory’s take
Leidos’ third quarter was marked by a negative market reaction, as the company’s revenue came in below Wall Street expectations and management lowered full-year revenue guidance. Management pointed to execution on its NorthStar 2030 strategy and a strong book-to-bill ratio as positives, but also acknowledged headwinds in the health segment and slower federal procurement cycles. CEO Tom Bell highlighted robust momentum in defense and homeland security, with new contract wins and expanding backlog as key drivers, while CFO Chris Cage emphasized the company’s efforts to diversify earnings power and control costs, stating, “Our entire team acted with urgency around cost control, which substantially drove margin and earnings.”
Looking to the remainder of the year and beyond, Leidos’ guidance reflects both optimism in its core markets and caution given ongoing contract transitions. Management expects defense and energy segments to be primary growth engines, citing recent wins in advanced sensing, munitions, and grid modernization. Bell noted, “Our path to double-digit revenue growth and mid-to-high teens margin in energy gets clearer every day,” but also cautioned that the health segment remains under pressure due to the VBA contract rebid. The company is positioning for a large pipeline of government awards, but flagged that some procurement decisions have been delayed and the outcome of the VBA contract could significantly impact future results.
Key insights from management’s remarks
Management attributed third quarter performance to strong defense and homeland growth, cost discipline, and ongoing portfolio realignment, while acknowledging continued uncertainty in the health segment and procurement delays.
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Defense and homeland momentum: The defense and homeland segments delivered robust growth, driven by new contract wins in space sensing, munitions, and air traffic management. Management described the defense tech business as a "mature disruptor" that is consistently winning larger, higher-margin contracts and transitioning programs from development into full-rate production.
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Portfolio sharpening and divestitures: Leidos completed the divestiture of its Security Enterprise Solutions (SES) business, forming a joint venture with Analogic. This move allows the company to focus investments on areas with greater long-term value, while maintaining an equity stake in the JV for ongoing upside.
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Cost control and margin impact: Urgent cost control efforts helped drive non-GAAP margin expansion, but also led to slower growth in cost-plus contracts. CFO Chris Cage pointed out that these actions improved earnings, even as they put downward pressure on certain revenue streams.
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Health segment uncertainty: The health segment, particularly the VBA disability exam contract, remains in transition. Management highlighted that the draft RFP for the contract rebid emphasizes demonstrated performance, but acknowledged that the outcome remains a key source of uncertainty and could impact both revenue and margins in future periods.
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Investment in commercial offerings: Leidos continues to develop AI and cyber products, such as Parcata, an automated cybersecurity platform. Management cited plans to expand commercial availability for these offerings, aiming to diversify revenue beyond traditional government contracts.
Drivers of future performance
Leidos’ forward guidance is shaped by accelerating defense and energy growth, as well as ongoing contract transitions and margin discipline.
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Defense and energy expansion: Management expects defense and energy to be the primary drivers of future growth, as production ramps in munitions, space sensing, and grid modernization projects. The company highlighted a $14 billion defense pipeline and a growing energy backlog, underpinned by increased utility investment and demand for cybersecurity solutions.
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Health contract risk: The outcome of the VBA disability exam contract rebid remains a major swing factor. While Leidos is the incumbent and believes it is well positioned, management acknowledged that the final structure and work share could materially affect the health segment’s contribution to earnings, with best-case scenarios involving increased market share and worst-case scenarios resulting in significant revenue loss.
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Margin management and portfolio mix: The company will continue to emphasize operational discipline and focus on higher-margin offerings, including commercial AI and cyber products. Management expects investments in production capacity and technology to support longer-term margin expansion, while cautioning that procurement delays and contract transitions may create near-term volatility.
Catalysts in upcoming quarters
In the coming quarters, the StockStory team will be watching (1) the outcome and work share allocation of the VBA contract rebid, (2) the pace at which defense and energy programs transition from development to rate production and drive revenue growth, and (3) whether Leidos can sustain margin improvement through disciplined cost control and increased commercial product adoption. New contract wins and progress in commercial AI and cyber offerings will be additional markers of execution.
Leidos currently trades at $134.36, down from $144.16 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).
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