DRS Q1 Earnings Call: Outperformance Driven by Defense Demand, Supply Chain Adjustments Highlight Risks

Aerospace and defense company Leonardo DRS (NASDAQ: DRS) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 16.1% year on year to $799 million. The company expects the full year’s revenue to be around $3.48 billion, close to analysts’ estimates. Its non-GAAP profit of $0.20 per share was 21.7% above analysts’ consensus estimates.

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StockStory’s Take

Leonardo DRS began the year with results that surpassed Wall Street expectations, driven by robust customer demand across its defense technology portfolio and the favorable timing of material receipts. CEO Bill Lynn emphasized that the company’s backlog reached $8.61 billion, underpinned by continued order strength in advanced infrared sensing, electric power and propulsion, and tactical radars. Management credited the acceleration of supplier deliveries and operational improvements for the quarter’s revenue growth, noting that domestic programs were the primary contributors while international sales saw a temporary dip due to delivery timing.

Looking ahead, management reaffirmed its full-year revenue and adjusted profit guidance, pointing to strong backlog visibility and consistent demand from U.S. defense customers. CFO Mike Dippold highlighted that quarterly results benefitted from early material receipts, which are expected to improve revenue linearity throughout the year. However, the team also acknowledged potential headwinds, including volatile germanium prices impacting margins and ongoing scrutiny of supply chain resilience. Management stressed that investments in facility expansion and technology development are intended to align DRS with evolving defense priorities and ensure readiness for future opportunities.

Key Insights from Management’s Remarks

Leonardo DRS’s first quarter was shaped by a combination of strong domestic demand, operational shifts, and supply chain adjustments. Management outlined several business dynamics that influenced both the quarter’s results and their expectations for the remainder of the year.

• Supply Chain Acceleration: The company attributed its revenue overperformance to accelerated supplier deliveries, which allowed certain material receipts to be recognized earlier than forecasted. CFO Mike Dippold indicated that this shift was broad-based rather than confined to specific programs, leading to improved confidence in the supply chain’s reliability.
• Domestic Program Growth: Management identified domestic defense programs—especially in ground and naval network computing, tactical radars, and electric power and propulsion—as the main sources of growth. International revenue dipped slightly in the quarter, largely due to the timing of deliveries to support Ukraine.
• Infrared Sensing Headwinds: A supply disruption from a sole-source optics supplier, related to rare earth mineral (germanium) sourcing, resulted in higher input costs and pressured profit margins in the Advanced Sensing and Computing (ASC) segment. Management responded by adjusting contract pricing and adding economic price adjustment clauses to mitigate future volatility.
• Shipbuilding Expansion: DRS is accelerating the completion of its Charleston facility and expanding its role in U.S. Navy shipbuilding, including investments to become a second source for steam turbine generators. Management highlighted ongoing discussions with the Navy and new opportunities for electric power and propulsion technologies in both manned and unmanned naval platforms.
• Technology Advancements: The quarter saw the introduction of an AI processor for real-time threat detection and mission computing on combat vehicles, as well as successful demonstrations of electric propulsion on unmanned surface vessels. Management believes these developments position DRS for future growth in rapidly evolving defense applications.

Drivers of Future Performance

Management’s outlook for the remainder of the year centers on sustaining organic growth through a strong backlog and ongoing investments, while navigating input cost pressures and potential defense budget shifts.

• Backlog Visibility: DRS’s sizable backlog and continued healthy bookings are expected to provide stability and predictability for revenue growth, with management targeting book-to-bill ratios above one for the year.
• Margin Expansion Drivers: The Integrated Mission Systems (IMS) segment, supported by expanding Columbia-class submarine content and operational efficiencies, is expected to drive the majority of margin improvement, while the ASC segment faces continued headwinds from input cost volatility.
• Risk Mitigation Efforts: Management is proactively addressing potential headwinds from volatile input costs—particularly germanium—by incorporating economic price adjustment clauses into future contracts and diversifying raw material sourcing to reduce supply chain risk.

Top Analyst Questions

• Michael Ciarmoli (Truist Securities): Asked if accelerated material receipts were linked to specific programs. CFO Mike Dippold clarified the acceleration was broad-based and that domestic demand led growth, while international sales saw a temporary decline.
• Alex Ladd (JPMorgan): Sought clarification on margin expansion for the year. Dippold explained that increased revenue volume would generate operating leverage, especially in the IMS segment, driving sequential margin improvement.
• Jon Tanwanteng (CJS Securities): Questioned why full-year guidance remained unchanged after a strong first quarter. CEO Bill Lynn responded that improved linearity and operational pacing, rather than conservatism, guided their approach to maintaining current targets.
• Unidentified Analyst (Bank of America): Asked about exposure to European defense opportunities as countries localize production. Lynn noted substantial near-term opportunities, especially in counter-drone and sensing programs, but acknowledged longer-term competition from local industry.
• Andre Madrid (BTIG): Queried about M&A priorities and managing germanium price volatility. Lynn confirmed M&A remains a capital allocation priority, while Dippold detailed that new contract clauses and diversified sourcing are being used to address supply risks.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) whether DRS can maintain its strong backlog growth and healthy book-to-bill ratios, (2) how effectively the company mitigates input cost pressures—especially around germanium—and maintains margin expansion, and (3) progress on capital projects such as the Charleston facility and new technology rollouts. Execution in these areas will provide key evidence of DRS’s ability to deliver on its stated strategy amid a dynamic defense environment.

Leonardo DRS currently trades at a forward P/E ratio of 37.1×. Is the company at an inflection point that warrants a buy or sell? The answer lies in our free research report.

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