Leonardo DRS: Pivoting to Software with Raft Acquisition While Defense Demand Surges
Q2 profits leap 33% on program execution; new $450M software deal extends platform-agnostic edge.
DRS · Earnings Call · 2026-07-30
Quadruple-digit backlog and a new software pivot
Leonardo DRS delivered another strong quarter, with organic revenue growth accelerating to 10% year-over-year, bookings exceeding $1 billion and book-to-bill at 1.2x, marking 18 consecutive quarters at or above 1.0. “Organic revenue growth accelerated to 10% year over year. Bookings exceeded $1 billion driving book-to-bill to 1.2x for the quarter.” — John A. Baylouny, President and Chief Executive Officer (CEO) · 2026-07-30 The highlight was a 33% surge in adjusted EBITDA, with margins expanding 240 basis points to 14%. Management attributed the outperformance to disciplined program execution, favorable mix, and the retirement of program risk.
But the strategic news was the announcement of a $450 million all-cash acquisition of Raft, a provider of open-architecture, multi-domain data fusion and AI mission software. CEO John Baylouny framed it as a natural extension of the company's platform-agnostic philosophy:
We have long said that we apply the same open or modular philosophy to software as we do hardware. Giving customers the flexibility to deploy the best of breed solutions without being locked into a single provider.
Raft was selected by the Army for its Next Generation C2 software architecture, and expands DRS's reach into Air Force, Space Force, special operations and intelligence agencies. The deal fills both technology and customer gaps, as Baylouny noted: “This acquisition really fills two of those. It fills the technology gap and the intelligence piece that I just spoke to, but also expanding our customer base.” — John A. Baylouny, President and Chief Executive Officer (CEO) · 2026-07-30
Demand across the portfolio
The company continues to see robust demand across its core mission areas. Air defense and counter-UAS remain early-cycle, with tactical radars embedded in fielded systems and order flow "running ahead of supply." “We are seeing from Ukraine lessons learned and changes in capability almost on a weekly basis we would expect that market to continue to evolve.” — John A. Baylouny, President and Chief Executive Officer (CEO) · 2026-07-30 In the quarter, DRS secured a contract for 50,000 camera cores for low-cost drones, tapping into the surge in low-cost drone production. It also booked orders across Columbia, Virginia, DDG-51 and LPD programs for naval propulsion and network computing, while investing in space-based interception capabilities aligned with Golden Dome. This builds on earlier management commentary about modular electric propulsion architectures, as Baylouny noted back in February: “We've been investing in different size motors, different size drives, different size components for those ships that would be applicable to any size ship.” — John Baylouny, President and Chief Executive Officer · 2026-02-24
The company's record funded backlog provides visibility into future growth. CFO Mike Dippold emphasized that the backlog is "a platform for sustained success" as the company moves up the value stack from components to solutions. Management has consistently highlighted that the defense budget priorities align with DRS capabilities: “First, the budget request represents a very high priority for defense in the United States... each of those elements is growing.” — John Baylouny, President and Chief Executive Officer (CEO) · 2026-05-05
Margins and guidance
Q2 margins benefited from a nonrecurring program risk retirement gain, particularly in the naval business. Excluding that, IMS margins would have been closer to 15%. Raising full-year adjusted EBITDA guidance to $525–540 million and EPS to $1.34–1.39, management expects Q3 revenue above $1 billion but adjusted EBITDA margin in the mid-13% range – a deliberate step-down from Q2's 14% due to the one-time gain. Despite the strong demand, the company maintains a balanced outlook: “From a revenue perspective, I would not assume that the bookings cadence is going to impact the revenue for 2026 significantly.” — Michael Dippold, Chief Financial Officer (CFO) · 2026-07-30
The fundamentals as of the latest 10-Q (filed May 5) show operating margin at 9.1% for Q1, but the Q2 report indicates a sharp acceleration. Operating margin has trended up over six years, and Q2's adjusted EBITDA margin of 14% confirms the operating leverage management highlighted.
Price action contrast
Interestingly, the stock has pulled back sharply despite the strong results. The full price tape shows a peak at $49.21 on July 28, just before the earnings release, followed by a 17.3% drawdown. Over the last 90 trading days, DRS is down 11.6%. This could reflect profit-taking after a run-up or broader defense-tech derating, but it does not appear to be a fundamental deterioration – consensus demand signals across the portfolio remain robust.
Bottom line
Leonardo DRS is executing well on a diverse set of defense thematics, and the Raft acquisition marks a strategic pivot toward mission software and AI that could extend growth into adjacent markets. With 18 straight quarters of book-to-bill at or above 1.0 and a record funded backlog, the company has strong visibility into 2027. The real question is whether the market will reward the software expansion and margin trajectory at current multiples.