Aerospace and defense company Leonardo DRS (NASDAQ:DRS) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 18.2% year on year to $960 million. The company expects the full year’s revenue to be around $3.58 billion, close to analysts’ estimates. Its non-GAAP profit of $0.29 per share was 3.8% above analysts’ consensus estimates.
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Leonardo DRS (DRS) Q3 CY2025 Highlights:
- Revenue: $960 million vs analyst estimates of $924.2 million (18.2% year-on-year growth, 3.9% beat)
- Adjusted EPS: $0.29 vs analyst estimates of $0.28 (3.8% beat)
- Adjusted EBITDA: $117 million vs analyst estimates of $116 million (12.2% margin, 0.9% beat)
- The company slightly lifted its revenue guidance for the full year to $3.58 billion at the midpoint from $3.56 billion
- Management slightly raised its full-year Adjusted EPS guidance to $1.10 at the midpoint
- EBITDA guidance for the full year is $445 million at the midpoint, below analyst estimates of $447.8 million
- Operating Margin: 9.7%, in line with the same quarter last year
- Free Cash Flow Margin: 8%, up from 5.8% in the same quarter last year
- Backlog: $8.91 billion at quarter end, up 7.8% year on year
- Market Capitalization: $10.69 billion
Company Overview
Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ:DRS) is a provider of defense systems, electronics, and military support services.
Revenue Growth
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Leonardo DRS’s sales grew at a tepid 5.8% compounded annual growth rate over the last five years. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Leonardo DRS.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Leonardo DRS’s annualized revenue growth of 14.5% over the last two years is above its five-year trend, suggesting its demand recently accelerated. 
Leonardo DRS also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Leonardo DRS’s backlog reached $8.91 billion in the latest quarter and averaged 44.8% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for Leonardo DRS’s products and services but raises concerns about capacity constraints. 
This quarter, Leonardo DRS reported year-on-year revenue growth of 18.2%, and its $960 million of revenue exceeded Wall Street’s estimates by 3.9%.
Looking ahead, sell-side analysts expect revenue to grow 4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.
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Operating Margin
Leonardo DRS has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.8%.
Looking at the trend in its profitability, Leonardo DRS’s operating margin rose by 1.3 percentage points over the last five years, as its sales growth gave it operating leverage.
This quarter, Leonardo DRS generated an operating margin profit margin of 9.7%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.
Leonardo DRS has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5%, subpar for an industrials business.
Leonardo DRS’s free cash flow clocked in at $77 million in Q3, equivalent to a 8% margin. This result was good as its margin was 2.2 percentage points higher than in the same quarter last year. Its cash profitability was also above its five-year level, and we hope the company can build on this trend.
Key Takeaways from Leonardo DRS’s Q3 Results
We were impressed by how significantly Leonardo DRS blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its full-year EBITDA guidance slightly missed. Overall, this print had some key positives. The stock traded up 1.5% to $40.79 immediately after reporting.
Is Leonardo DRS an attractive investment opportunity right now? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.