Aerospace and defense company Leonardo DRS (NASDAQ:DRS) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 10.1% year on year to $829 million. The company’s full-year revenue guidance of $3.56 billion at the midpoint came in 1.2% above analysts’ estimates. Its non-GAAP profit of $0.23 per share was 7.4% above analysts’ consensus estimates.
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Leonardo DRS (DRS) Q2 CY2025 Highlights:
- Revenue: $829 million vs analyst estimates of $826.5 million (10.1% year-on-year growth, in line)
- Adjusted EPS: $0.23 vs analyst estimates of $0.21 (7.4% beat)
- Adjusted EBITDA: $96 million vs analyst estimates of $93.52 million (11.6% margin, 2.7% beat)
- The company lifted its revenue guidance for the full year to $3.56 billion at the midpoint from $3.48 billion, a 2.5% increase
- Management raised its full-year Adjusted EPS guidance to $1.09 at the midpoint, a 3.3% increase
- EBITDA guidance for the full year is $445 million at the midpoint, below analyst estimates of $451 million
- Operating Margin: 8.4%, up from 7.3% in the same quarter last year
- Free Cash Flow was -$56 million, down from $1 million in the same quarter last year
- Backlog: $8.61 billion at quarter end, up 8.6% year on year
- Market Capitalization: $12.82 billion
“Leonardo DRS delivered another set of strong financial results marked by healthy bookings, solid organic revenue growth and continued profit and margin expansion in the second quarter. The need to deter and contest heightened global threats continues to bolster customer demand for our innovative, high-performance technologies. Amidst a more dynamic macro backdrop, we remain focused on disciplined execution and delivering differentiated capabilities to customers,” said Bill Lynn, Chairman and CEO of Leonardo DRS.
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
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Leonardo DRS grew its sales at a tepid 5.7% compounded annual growth rate. 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 13.6% over the last two years is above its five-year trend, suggesting its demand recently accelerated. 
We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Leonardo DRS’s backlog reached $8.61 billion in the latest quarter and averaged 50.1% 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’s year-on-year revenue growth was 10.1%, and its $829 million of revenue was in line with Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 4.8% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming 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 10.6%.
Analyzing the trend in its profitability, Leonardo DRS’s operating margin rose by 1.7 percentage points over the last five years, as its sales growth gave it operating leverage.
In Q2, Leonardo DRS generated an operating margin profit margin of 8.4%, up 1.1 percentage points year on year. This increase was a welcome development and shows it was more efficient.
Cash Is King
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Leonardo DRS has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.5%, subpar for an industrials business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Leonardo DRS to make large cash investments in working capital and capital expenditures.
Taking a step back, an encouraging sign is that Leonardo DRS’s margin expanded by 2.9 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.
Leonardo DRS burned through $56 million of cash in Q2, equivalent to a negative 6.8% margin. The company’s cash burn increased meaningfully year on year and is a deviation from its longer-term margin, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings.
Key Takeaways from Leonardo DRS’s Q2 Results
We were impressed by how significantly Leonardo DRS blew past analysts’ backlog expectations this quarter. We were also glad it raised its full-year revenue and EPS guidance. On the other hand, its full-year EBITDA guidance slightly missed. Overall, we think this was a decent quarter with some key metrics above expectations. The market seemed to be hoping for more, and the stock traded down 1.5% to $47.50 immediately after reporting.
Should you buy the stock or not? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.