Earnings Call Transcript - ESLT Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Third Quarter 2025 Results Conference Call. As a reminder, this conference is being recorded. I would now like to hand over the call to Daniella Finn, Elbit Systems' VP, Investor Relations. Daniella, please go ahead.

Daniella Finn, VP, Investor Relations

Thank you, Karen. Hello, everyone, and welcome to our third quarter 2025 earnings call. On the call with me today are Butzi Machlis, President and CEO of Elbit Systems; and Kobi Kagan, Corporate CFO. Before we begin, I would like to point out that the safe harbor statement in the company's press release issued earlier today also refers to the contents of this conference call. As usual, we will provide you with both GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional detail to help understand the performance of the ongoing business. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliation in today's press release. Kobi will begin by providing a discussion of the financial results, followed by Butzi, who will talk about some of the significant developments during the quarter and beyond. We will then turn the call over to question-and-answer session. With that, I would like to now turn the call over to Kobi. Kobi, please go ahead.

Kobi Kagan, CFO

Thank you, Daniella. Hello, everyone, and thank you for joining us today. We are very pleased to announce another set of quarterly results with double-digit year-over-year growth in revenues, backlog and EPS. Quarterly free cash flow was solid at $101 million, underscoring our healthy cash generation. I will now highlight and discuss some of the key figures and trends in our financial results this quarter. Third quarter 2025 revenues were $1.922 billion, compared to $1.718 billion in the third quarter of 2024, a solid 12% growth in quarterly revenues year-over-year and 18% growth for the 9 months ended 30th September. In the third quarter of 2025, Europe contributed 28%; North America, 21%; Asia Pacific, 14%; and Israel was 33% of revenues. GAAP gross margin in the third quarter was 24.9% of revenues compared to 24% in the third quarter of 2024. The non-GAAP gross margin for the third quarter was 25.2% of revenues, compared to 24.4% in the third quarter of 2024. GAAP operating income for the third quarter was $171.4 million or 8.9% of revenues versus $125.8 million or 7.3% of revenues in the third quarter of 2024. Non-GAAP operating income was $186.7 million or 9.7% of revenues, compared with $140.7 million or 8.2% of revenues in the third quarter of last year. We are very pleased with this margin expansion trajectory. The operating expense breakdown in the third quarter was as follows: net R&D expense were $129.1 million or 6.7% of revenues, compared to $119.9 million or 7% of revenues in the third quarter of 2024. Elbit continues to invest in R&D to secure future profitable growth, which will maintain Elbit's position as the market leader in years to come. Marketing and selling expenses were $91 million or 4.7% of revenues versus $91.3 million or 5.3% in the third quarter of 2024. G&A expenses were $86.7 million or 4.5% of revenues, compared to $75.7 million or 4.4% of revenues in the third quarter of 2024. Financial expenses were $34.5 million in the third quarter, compared to $45 million in the third quarter of 2024. The decrease in financial expenses, net in the third quarter of 2025, was mainly due to a reduction in the average net debt. We recorded a tax expense of $11.4 million in the third quarter compared to $12.8 million in the third quarter of 2024. The effective tax rate in the third quarter of 2025 was 8.2% compared to 14.6% in the third quarter of 2024. The decrease in the effective tax rate for the third quarter of 2025 was mainly due to the increase in deferred tax assets. GAAP diluted EPS was $2.80 for the third quarter of 2025 compared to $1.77 in the third quarter of 2024. Our non-GAAP diluted EPS was $3.35 for the third quarter of 2025, compared to $2.21 in the third quarter of 2024. Quarterly segment revenue for the third quarter of 2025: Aerospace, third quarter revenues decreased by 3% year-over-year, mainly due to a decrease in Precision Guided Munition sales in Asia Pacific, partially offset by the increase in PGM sales in Israel and an increase in unmanned aerial system sales in Europe. Revenues for the 9 months were up 9%. C4I and Cyber, revenues increased by 14% year-over-year, mainly due to radio systems and command and control system sales in Europe. For the 9 months, revenue rose by 15%. ISTAR and EW, revenues increased by 5% in the third quarter of 2025, mainly due to Electro-Optic systems and Electronic Warfare systems sales in Israel and high-power laser sales in Israel. For the 9 months, revenue increased by 8%. Land revenue increased by 41% in the third quarter of 2025, due to ammunition and munition sales in Israel and in Europe. For the 9 months, revenues were up 44%. Elbit Systems of America, revenues decreased by 2% due to a decrease in Electronic systems and medical instrument sales, partially offset by the increase in Maritime and Warfighter system sales. For the 9 months, revenue rose 6%. The order backlog as of September 30, 2025, was $25.2 billion, $3.1 billion higher than the backlog at the end of the third quarter of 2024, and $1.4 billion higher than the backlog in the second quarter of 2025. The increase in backlog during the quarter came mainly from new European orders. Approximately 69% of the current backlog is derived from orders outside of Israel. Approximately 38% of the current backlog is scheduled to be performed during the remainder of 2025 and during 2026. The rest is scheduled for 2027 and beyond. Cash flow provided by operating activities in the 9 months ended September 30, 2025, was $461 million, as compared to $82.5 million in the 9 months ended September 30, 2024. The cash flow in the 9 months ended September 30, 2025, was affected mainly by the strong increase in net income. On the back of the continuous strength of the company’s result, the Board of Directors declared a dividend of $0.75 per share to be paid on January 5, 2026. I will now turn the call over to Mr. Machlis, Elbit’s CEO. Butzi, please go ahead.

Bezhalel Machlis, CEO

Thank you, Kobi. Hello, everyone, and thank you once again for joining us today. As Kobi just described, these results continued the growth and margin expansion trajectory, driven by strong demand for our solutions, particularly in Europe and Israel. Elbit's seventh consecutive quarter of double-digit growth further demonstrates our global leadership on the modern battleship. Our recently tested and proven solutions position us as the leading authority in our rapidly changing industry as defense budgets continue to rise globally and our customers seek cutting-edge battle-proven systems to secure and protect their populations. Our portfolio of ever-relevant technologies supports our customers' pursuit of advanced warfighter solutions across all domains. On the back of the strong results, I am proud that we continue to improve the translation of our revenue growth into both profit and cash flow. This is the fifth consecutive quarter where we delivered positive free cash flow and improved the company's cash conversion. Yesterday, we announced the signing of an international contract for a strategic solution for approximately USD 2.3 billion. This contract will be performed over a period of 8 years. I'm extremely pleased with the announcement of the largest contract in Elbit history, further testament to the superiority of our products and technologies. We will continue to equip our customers with advanced and relevant solutions. During the quarter, Elbit received another large contract to supply a European country with a range of our solutions totaling USD 1.635 billion to be delivered over the next 5 years. The contract includes long-range precision strike artillery-rocket systems and a broad spectrum of unmanned reconnaissance and loitering aerial combat systems, highly sophisticated ISTAR capabilities, including SIGINT, COMINT, and electronic warfare systems. Enabled intelligence collection and processing systems will also be delivered, along with advanced electro-optic and night-vision systems, combat vehicle upgrades, and protective systems. New orders also included contracts for our Hermes 900 drones, advanced airborne munitions for the IMOD, and a USD 260 million contract for the DIRCM system to Airbus. Following the 12-day campaign against Iran, Elbit has seen growing interest in our solutions, mainly but not exclusively for the Hermes drones, EW systems, and training platforms. The Hermes platforms enable us to cross-sell products for other segments and offer our customers comprehensive solutions. Since its first order in 2011, the Hermes 900 has been selected by over 20 customers worldwide. In August, we successfully launched the advanced JUPITER space camera aboard the National Advanced Optical System satellite, supporting a wide span of earth observation missions, including military operations, environmental monitoring, and scientific research. Developed by Elbit System ISTAR and EW, JUPITER is one of the world's most advanced space cameras, featuring a very large aperture and exceptionally lightweight design. The camera is multispectral, offering a combination of imaging channels. During the quarter, we expanded our operations in Europe, opening new facilities in Sweden and Germany to enhance our local delivery capabilities to ensure more secure, faster support to our customers. Being close to our customers is crucial for us, and our enhanced presence in Europe strengthens our ability to deliver modern and reliable solutions at the pace required to ensure the uncompromised capability to defend Europe from its offenders. In June, we launched PAWS 2, a next-generation infrared missile warning system for fighter aircraft designed to enhance their survivability and operational effectiveness. The system detects a wide range of threats regardless of seeker type and provides advanced protection for fighter jets, transport aircraft, and helicopters operating in complex high-threat environments. At DSEI, we unveiled Frontier, a cutting-edge wide-area persistent surveillance system designed to address the increasing complexity and intensity of border protection challenges. Frontier autonomously operates multiple types of sensors to visually confirm and classify threats, transmitting only the most relevant analyzed information to the appropriate forces. It leverages advanced artificial intelligence to optimize intelligence gathering and decision-making across land, air, and maritime domains. All these notable achievements would not have been possible without our dedicated employees whose day-and-night commitment to Elbit is truly unique. I would like to thank each and every one of our outstanding employees for their continued professionalism and dedication. And with that, I will be happy to answer your questions. Operator?

Operator, Operator

The first question is from Jordan Lyonnais of Bank of America.

Jordan Lyonnais, Analyst

So with the ceasefire now happening, how enduring are you guys thinking about the domestic demand? And if we do see a slowdown in the domestic bookings, how should we think about the trade-off with margins as orders start to skew more towards international?

Kobi Kagan, CFO

Thank you, Jordan. So your question about the domestic demand, we can look at this quarter. We had an increase of $1.4 billion in our backlog, $200 million in Israel and $1.2 billion outside of Israel. We are looking at that as some kind of the nature of the growth of the backlog for the future. We are targeting around flattish backlog in Israel and growth outside of Israel, predominantly in Europe. That will be the growth area, which we see our funnel, we see our opportunities, and we see the demand that's coming out from Europe. We think that this is the place that predominantly will provide the growth in the future in the backlog.

Operator, Operator

The next question is from Seth Seifman from JPMorgan.

Seth Seifman, Analyst

I wanted to ask about when we think about the Aerospace business from here, and we saw the decline in the quarter. How should we think about the trajectory in that business going forward? I know you called out some decline in sales to Asia but also some drone orders during the quarter. So kind of where does that go from here?

Bezhalel Machlis, CEO

It's Butzi. I believe that we will continue to see growth in this segment as well. First, I would like to mention that our avionics are embedded on top of most of the Western platforms. It includes our helmet, but not only that, also quite a lot of other equipment from us is embedded in many platforms across many countries, not just in the U.S. So we enjoy revenues coming from international sales of Boeing and Lockheed and other OEMs of all the platforms they bought. So I really feel that this market will continue to grow for us. And I would like also to mention UAVs. There is a huge demand for UAVs, for loitering munition. We have 20 international customers who have bought, until now, the Hermes 900 from us. We provide not just a platform; we provide an integrated solution, which includes all our sensors and payloads, and we have a very unique offering to our customers. They see a growing market for main UAVs, but also for small UAVs and for loitering munitions, which are all under the Airborne segment. So I believe that this segment will continue to grow the company in Israel and mainly abroad.

Kobi Kagan, CFO

And Seth, this is Kobi to further add on Butzi's answer. If you look at the three quarters compared to three quarters last year, the Aerospace segment grew 9%. We believe that the relevant growth figure for Aerospace is single-digit revenue growth, as this segment is heavily reliant on the U.S. budget, with much of its revenue coming from there, which follows a single-digit budget growth. Therefore, we think this is the important figure for this quarter in this segment.

Seth Seifman, Analyst

Okay. Excellent, excellent. If I could add one follow-up question. Can you talk a little bit more about the opportunities that are emerging in directed energy? We've seen some of the progress on IRON BEAM. Are you seeing a lot of opportunities emerge for directed energy solutions outside of Israel as well?

Bezhalel Machlis, CEO

Yes. The answer is yes. As you know, we are part of the Israeli program for ground high-power laser systems. The laser source comes from us, and the first system should be deployed by the end of this year, the IRON BEAM system. I believe that next year, we'll see many more orders here in Israel for ground high-power lasers. Based on the success in Israel, there's a lot of interest in many other places for high-power lasers and for ground high-power laser systems, and we are part of this solution. Here in Israel, we lead the airborne high-power laser system. It's still in the development phase, but I believe that there is very big potential for us with this system. I think that high-power lasers in the air will be a game changer in how countries fight against drones and cruise missiles. This is still under development, but there is a lot of interest from many customers abroad. We are not just developing high-power lasers; we have other types of energy weapons, which are in a very advanced phase of development. Some of them are confidential, but I can tell you that they are very unique. We really believe that this energy weapons activity is a very important growth engine for Elbit for the future.

Operator, Operator

The next question is from Ellen Page of Jefferies.

Ellen Page, Analyst

Just the margin was very strong in the quarter on a year-over-year and sequential basis. Can you discuss the drivers of that? And was there any element of mix that supported profitability in the quarter? And how do we think about the progression of margins from here?

Kobi Kagan, CFO

Ellen, if you notice, there is a very strong expansion in margin this quarter, as you indicated, which comes as a 0.9% improvement, a 1% shy of 1% in the gross profitability of the company, with an additional 0.5% on the operational expenses. We are looking at a 1% expansion in the gross profitability and a 1.5% expansion in the operational profitability. Those two are the fruits of improvement in our backlog profitability and for using a lot of operational excellence both investments and processes that were inaugurated in the company, including using AI for different operational purposes. This is driving our operational profitability and our gross profitability up. This is the first quarter that we see this kind of expansion in both gross profitability and operational profitability. Additionally, we are also doing CapEx investments, which are yielding results. As we discussed many times in the past, the ERP system that is fully operational and the robots and cobots that we are also using now are mainly in the ammunition and munition factories. To summarize everything, we can see that we have our advantages in size; with the increase in revenue, we are doing better conversion to profits.

Ellen Page, Analyst

Great. That's very helpful. And how do we think about the impact of fewer operational disruptions assuming the ceasefire holds? Is that an opportunity for another step up from here?

Kobi Kagan, CFO

We are very pleased with the ceasefire, which we all hoped for after two years of conflict. We hope this calm will be maintained in Israel. For our company, it allows us to regroup, enable our teams to return for mobilization, and get back to normal operations. As you know, Elbit primarily operates outside of Israel, which is our strength as about 70% of our business is conducted internationally. This enables us to invest more in our operations abroad and focus on resuming normal activities as we did before the conflict began on October 7th. This situation creates an opportunity for us to secure new business and strengthen our backlog.

Operator, Operator

I'm passing the call to Daniella Finn. Please go ahead.

Daniella Finn, VP, Investor Relations

Thank you, operator. We have a couple of questions from an analyst. Thank you very much for your questions today. The first one is, has there been an update to the company's profitability target for 2026, regarding 10% operating profit following the expansion of the order backlog and the improvement in gross margins in the current quarter?

Kobi Kagan, CFO

Thank you, Daniella. As you know, we're not providing specific targets and guidance. However, we will still maintain our internal targets to continue to improve our profitability. This is, of course, a strong target in the company as well as the cash conversion, which is a principal target in the company to continue the improvement in cash conversion.

Daniella Finn, VP, Investor Relations

Thank you, Kobi. And the second question from the analyst, how does Elbit plan to generate added value from the significant expansion in the U.S. DoD's budget? Specifically, is there a concrete plan to pursue an M&A transaction in the U.S. and/or expand into verticals such as drone swarms or border protection applications?

Bezhalel Machlis, CEO

Thank you, Daniella. The U.S. market is very strategic to Elbit. We see the U.S. as our home market, and I am very pleased with our performance in the U.S. The last two positions we made, the night-vision activity and Sparton, the sonobuoys activity, are both very successful and growing. We are certainly looking for opportunities for acquisitions in the U.S., and we are exploring the market. I would like to say that in the past, we delivered a system to the CBP for border protection, and our system is deployed along the borders. We believe that the current need for additional systems along the borders is very relevant to us, and we are planning to pursue it. The rest of our activities in the U.S. are also very successful. Our avionics activities are growing, and our Active Protection System is doing very well in the U.S. on top of the Bradley tank. We will continue to invest in the U.S. and recruit additional people, and we would like to expand our position in this very important market going forward.

Daniella Finn, VP, Investor Relations

Thank you, Butzi. Operator, if there are no more questions, we can wrap up.

Operator, Operator

Before I ask Mr. Machlis to go ahead with his closing statement, I'd like to remind participants that a replay of this call will be available 2 hours after the conference ends. In the U.S., please call 1 (888) 782-4291. In Israel, please call (03) 925-5900; and internationally, please call (972) 3925-5900. A replay of the call will also be available at the company's website.

Bezhalel Machlis, CEO

I would like to thank everyone on the call for joining us today and for your continued trust and support of Elbit. Have a good day and goodbye.

Operator, Operator

Thank you. This concludes the Elbit Systems Ltd., Third Quarter 2025 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.