Elbit Systems (ESLT) Q3 2025: Backlog Surges $3.1B as European Demand Drives 12% Growth Trajectory
Elbit Systems delivered its seventh straight quarter of double-digit growth, driven by a $3.1B backlog increase anchored in European orders and robust demand for advanced defense solutions. Margin expansion and record contract wins highlight operational leverage and global relevance, while management signals a pivot toward international growth as Israeli demand plateaus. Investors should watch for the translation of this record backlog into sustained profit and cash flow as Elbit deepens its European and U.S. market presence.
Summary
- European Orders Accelerate: Backlog expansion is increasingly driven by multi-year European contracts and new solutions.
- Margin Leverage Materializes: Operational improvements and scale are translating to higher profitability and cash conversion.
- International Mix to Dominate: Strategic focus is shifting toward non-Israeli markets as domestic growth levels off.
Performance Analysis
Elbit posted 12% year-over-year revenue growth, with total sales reaching $1.92 billion for the quarter. The company’s growth is not just broad-based but increasingly international—Europe contributed 28% of revenue, North America 21%, Asia Pacific 14%, and Israel 33%. The standout metric is the order backlog, which climbed to $25.2 billion, up $3.1 billion from last year and $1.4 billion sequentially, with 69% of the backlog now from outside Israel—signaling a decisive pivot in geographic mix.
Profitability also improved, with GAAP gross margin rising to 24.9% and non-GAAP operating margin up to 9.7% of revenue. The margin expansion was driven by a combination of improved contract mix, operational excellence initiatives (including AI and robotics in manufacturing), and scale benefits. Free cash flow was robust at $101 million for the quarter, and $461 million year-to-date, reflecting improved cash conversion from higher net income and working capital management.
- Land Segment Outpaces: Land systems revenue jumped 41% YoY, reflecting European and Israeli munitions demand.
- Mixed Aerospace Dynamics: Aerospace revenue dipped 3% YoY due to Asia Pacific softness, but management expects a return to growth on the back of UAV demand and embedded systems sales.
- R&D Investment Sustained: R&D spend held at 6.7% of revenue, underscoring commitment to innovation in high-growth domains like lasers and AI-enabled systems.
Dividend payout was maintained at $0.75 per share, reinforcing capital discipline amid expansion. The company’s performance is increasingly decoupled from Israeli defense cycles, with European and U.S. opportunities now the principal growth engines.
Executive Commentary
"These results continue the growth and margin expansion trajectory driven by strong demand for solutions, particularly in Europe and Israel. Elbit's seventh consecutive quarter of double-digit growth further demonstrates our global leadership on the modern battlefield... Our recently tested and proven solutions position us as the leading authority in our rapidly changing industry."
Butsy Machlis, President and CEO
"There is a very strong expansion in margins in this quarter... Those two are the fruits of improvement in our backlog profitability and for using a lot of operational excellence, both investments and also processes that were inaugurated in the company, including using AI for different purposes of operational use."
Coby Kagan, Corporate CFO
Strategic Positioning
1. European Demand as a Structural Growth Engine
Europe is now the primary engine of backlog growth, with new multi-year contracts for advanced artillery, unmanned systems, and electronic warfare. Recent wins include a $2.3 billion international contract—the largest in Elbit’s history—and a $1.65 billion European contract spanning five years. Management is building out local delivery capabilities with new facilities in Sweden and Germany to ensure faster, more secure support and deepen customer relationships.
2. Technology Leadership and Portfolio Breadth
Elbit is leveraging its portfolio of battle-proven, multi-domain systems—from Hermes 900 drones to high-power lasers and advanced space cameras—to cross-sell and offer integrated solutions. The company’s leadership in directed energy (notably the Iron Beam laser system) and AI-enabled intelligence platforms is opening new international markets and positioning Elbit for future defense spending priorities.
3. Operational Excellence and Digital Transformation
Margin expansion is being driven by operational initiatives such as the deployment of a unified ERP system, use of robotics and automation in manufacturing, and AI applications across the value chain. These investments are now flowing through to both gross and operating margins, with management citing improved backlog profitability and scale benefits.
4. U.S. Market Expansion and M&A
Elbit views the U.S. as a strategic “home market” and is actively seeking further acquisitions to expand its presence. Recent M&A (Night Vision and Spartans) is performing well, and the company is targeting growth in border security and active protection systems. Management is investing in local hiring and infrastructure to support this push.
5. R&D-Driven Future Growth
With R&D spend at nearly 7% of revenue, Elbit is investing for leadership in next-generation domains—including drone swarms, AI-driven C4I, and advanced sensors. The company’s ability to secure large, multi-year contracts is increasingly tied to its innovation pipeline and the integration of proprietary technologies into customer solutions.
Key Considerations
Elbit’s Q3 demonstrates a business at an inflection point, leveraging technology, operational scale, and geographic diversification to capture outsized demand in a rapidly evolving defense landscape.
Key Considerations:
- Geographic Shift in Backlog: Europe and other international markets now drive the majority of new orders, reducing reliance on Israeli defense cycles.
- Record Contract Wins: Multi-year, multi-billion dollar contracts provide long-term revenue visibility and operational scale.
- Operational Leverage: Digital transformation and automation are translating backlog into higher profits and cash flow.
- Technology-Driven Differentiation: Proprietary systems in UAVs, lasers, and AI-enabled platforms underpin competitive advantage and pricing power.
- Capital Allocation Discipline: Consistent dividend and selective M&A signal balanced growth and shareholder focus.
Risks
Execution risk remains in the translation of record backlog into timely revenue and profit, especially as contract complexity rises and operations expand internationally. Geopolitical shifts, potential defense budget volatility, and competitive moves in the U.S. and Europe could challenge growth. Additionally, the margin trajectory depends on continued operational discipline and successful integration of new digital and automation initiatives. Management’s ability to navigate the evolving mix of domestic and international demand will be critical.
Forward Outlook
For Q4 2025, Elbit signaled:
- Continued focus on converting backlog into revenue and cash flow, with an emphasis on European and U.S. opportunities.
- Ongoing operational improvements to drive further margin expansion and cash conversion.
For full-year 2025, management maintained its commitment to:
- Profitability and cash conversion improvement targets, though no explicit guidance was issued.
Management highlighted several factors that will shape results:
- Execution of large, multi-year contracts in Europe and internationally
- Continued investment in R&D and operational excellence to sustain margin gains
Takeaways
Elbit’s Q3 marks a decisive pivot toward international growth, with backlog and profitability at record levels. Investors should monitor the pace of backlog conversion and margin sustainability as the company scales in Europe and the U.S.
- Backlog Mix Shift: European and international orders now anchor growth, providing multi-year visibility and lowering Israeli cyclicality exposure.
- Margin Expansion: Operational excellence and digital transformation are translating scale into profits, but continued execution is needed to sustain gains.
- Innovation Pipeline: Future growth and contract wins will depend on continued R&D investment and successful integration of advanced technologies into customer solutions.
Conclusion
Elbit Systems delivered another quarter of robust growth and margin expansion, underpinned by record backlog and strategic wins in Europe. The company’s operational discipline and innovation pipeline position it well for sustained international expansion, but investors should closely track execution risks and the translation of backlog into profitable revenue as the business scales globally.
Industry Read-Through
Elbit’s results underscore a broader defense industry shift toward multi-domain, technologically advanced solutions and sustained European rearmament. The surge in European orders and focus on integrated systems suggest that defense primes with strong R&D, automation, and digital capabilities will be best positioned to capture long-cycle demand. The operational leverage and backlog conversion challenges highlighted by Elbit are instructive for peers, as industry-wide contract complexity and delivery expectations rise. The U.S. and Europe remain the primary battlegrounds for growth, with innovation and execution as key differentiators.