Q3 2025 Red Cat Holdings Inc Earnings Call
Speaker #1: to Red Cat's third quarter 2025 earnings conference call. My name is Steve, and I'll be your operator for today's are the Red Cat CEO, Jeff Thompson, and CFO, Chris Ericson.
Speaker #1: Please note that certain information discussed on today's call will include forward-looking statements of our future events and Red Cat's business strategy and future financial and call.
Speaker #1: operating performance. are subject to risk, uncertainties, These forward-looking and absorption that are difficult actual results to differ materially from those started or implied by those statements.
Speaker #1: our comments on the call today contain reference to non-GAAP financial measures such as Joining us metrics such as annual Certain of this risk, non-GAAP measures should be viewed in addition to and not as results.
Speaker #1: reconciliation of these non-GAAP recurring revenue, A GAAP measures as well metrics referenced and management reasoned for including the non-GAAP measures and key business metrics referenced may be found in the as definition of the key business press measures to their most directly compared call will be recorded and made available for replay alternative for the company's reported GAAP release.
Speaker #1: I would like to remind everyone that this website at ir.redcatholdings.com. With Finally, that, I'll turn the call over to Relations sections of the company's Jeff.
Speaker #2: The call. I will start by providing some The 2025 earnings high-level commentary on our financial about our unique market position and initiatives. Red Cat delivered a record-breaking third quarter with revenues of $9.6 million, up 200% from second quarter of 2025.
Speaker #2: results and then share exciting updates Q4 will be more revenue in one quarter than we have ever done in a 12-month revenue growth period.
Speaker #2: A majority of that almost $40 million of revenue in 2025 will have been Q3, and shipped in the second half of Q4. That's just $1.5 quarters.
Speaker #2: This our drone and robotic solutions across performance reflects the accelerating adoption of defense and national security sectors. Our product portfolio has reached new levels of validation and market acceptance.
Speaker #2: We are uniquely positioned and have built capacity to meet 1 million drones. We are the U.S. volume. Here are additional speed and milestones we achieved: this Army's need for readiness with the quarter.
Speaker #2: The limited rate contract we signed in July initial production tranche two 35.1 million. We launched Blue Ops, our new now maritime division focused on uncrewed surface vessels.
Speaker #2: With facilities now established in Georgia, Maine, and Southeast Florida. Our FAANG FPV drone was officially added to the Blue UAS cleared list, a critical validation for U.S.
Speaker #2: government use and now being used by other PM UAS categories. We successfully completed flight testing with Palantir's visual navigation software on our Black Widow platform, enabling operations in GPS-denied environments and now a Black Widow product option that will improve Black Widow margins through software sales.
Speaker #2: We announced a strategic partnership with Aero Environment, enabling deployment of FAANG from the P550 UAS, part of the LR program of record, and Edge Autonomy is deploying the Black Widow on their long-range platform.
Speaker #2: Our Black Widow system was approved for NATO NSPA catalog opening doors to NATO members, and partner nations, and possible foreign military sales. To impact that the Black Widow system valued at $35 million demonstrates the military's confidence in our technology and manufacturing capabilities.
Speaker #2: Army alone. While we approaching $40 million for the U.S. experience a six to seven-week delay due to change orders that pushed the first shipments to mid-August, this reflects dynamic nature of defense requirements and our ability to adapt to solutions to meet evolving specifications.
Speaker #2: We received the new changes at the end of July, and delivered the first LRIP drones three weeks later. We continue to ship at volume.
Speaker #2: Perhaps the most exciting strategic expansion is the launch of Blue Ops. Our new maritime division, this represents a natural extension of our autonomous systems expertise into a high-growth, into a high-growth adjacent market.
Speaker #2: technology gives Blue proved that we can do quick changes and in Europe with a battle-proven boat Ops a three-year advantage in the USB Our partnership space.
Speaker #2: And we expect our first boat hulls to be completed in December. With potential pricing from about $750,000 to $1.5 million per unit. This division opens up substantial new revenue opportunities.
Speaker #2: We now opened $155,000 square foot manufacturing facility in Georgia capable 500 to 1,000 vessels per year. An of building more than established sales showroom and lab in Southeast Florida, and built some of the most complex boat technology in the industry.
Speaker #2: We a prototype partner in Maine that has believe this is the most undervalued Red Cat asset. If we only ship 200 boats at the low end $150 million in revenue.
Speaker #2: Red Cat believes factories are the moat. Additional expansion strategies are manufacturing speed and volume and we propelled by the need for believe factories are becoming the new moat for defense.
Speaker #2: We have doubled our manufacturing space in Salt Lake City and doubled our manufacturing space in Los Angeles and we have U.S. capabilities for of pricing, that is to new hull design in months production.
Speaker #2: Now to provide the Army SRR program update. We continue to execute on the U.S. Army's short-range reconnaissance LRIP contract signed in July, which has been expanded and is now valued at $ million.
Speaker #2: So let me share some context on changes in our revenue outlook and where our projections are shifting slightly to the program. The anticipated SRR contract took an extended amount of time to finalize.
Speaker #2: The government budget was not signed until July 4th, and we're still receiving changes to the Black Widow as late as the last week in July.
Speaker #2: The unanticipated delay shifted our expected revenue recognition by about six to seven weeks to the right. But our long-term trajectory remains unchanged. In fact, the recent $35 expansion of the LRIP contract at $35 million gives us further excitement of the future trajectory of the U.S.
Speaker #2: public announcements and specifically the $1 million drones last week. We expect to announce additional contracts and partnerships in the coming months including developments in our USV segment, Edge 130 move to Trichon, new power capabilities combined with we are needing to lower our full year revenue swarming.
Speaker #2: guidance range from for 2025 to between 30.5 to Given some of the delays mentioned, 37.5. Q4 guidance is just below a $100 million annual run rate.
Speaker #2: We remain very optimistic about our ability to recover revenue from the delayed continuing resolution known as the "one big beautiful bill" and the government shutdown of 2025.
Speaker #2: Demand has grown significantly in the last three months with the Army alone looking for millions of drones. We are currently implementing warp speed in Salt Lake City.
Speaker #2: And we expect to send Palantir in four deployed engineers to the FlightWave Long Beach facility, then soon to Georgia for the Blue Ops facility. We believe running our factories utilizing Palantir's Warp Speed will give us lower costs, higher margins, better operating metrics, better visibility, and help us dominate against old, crusty prime vendors.
Speaker #2: As you know, we also previously announced our new product with partnership with Palantir for visual navigation. We also expect to launch other important products from Palantir on the Black Widow and the USV products earlier next year as partnerships continue to grow with Palantir utilizing their AI products.
Speaker #2: I will now turn the call over to Chris to discuss our financial results. All right. Thank you, Jeff. And good afternoon, everyone. Appreciate everyone jumping on today.
Speaker #2: As Jeff mentioned, we're pleased with our record third quarter 2025 results. Absolutely ecstatic. Our financial performance reflects the success of our ongoing strategic initiatives and our commitment to delivering value to our shareholders.
Speaker #2: On the income statement side, revenues were 9.6 million dollars for the third quarter of 2025. Now, this is trending up from 3.2 million dollars in the second quarter and up further from the 1.6 million dollars in Q1 of 2025.
Speaker #2: It's improving trend is due to increasing product revenue as we have started delivering drones to the U.S. Army. Under the SRR program, gross profit was 638,000 in the third quarter of 2025, up from 375,000 in the second quarter of 2025.
Speaker #2: Margins have been primarily driven by higher revenues in the two consecutive quarters. Q3 gross profit was the largest increase compared to the gross loss of 392,000 in the third quarter of 2024 and improvement of over a million dollars.
Speaker #2: On a percentage basis, gross profit for this quarter was 7% compared to a gross loss of 30% during the third quarter of 2024. The year-over-year same quarter change is due to higher utilization of plant capacity and decreased inventory obsolescence in 2025 compared to 2024.
Speaker #2: On our operating expense side, we've strategically increased the areas of R&D and G&A to support our rapid growth trajectory and market expansion initiatives. During Q3 of 2025, we invested approximately 6 million dollars into R&D, a quarterly increase of 66% over Q2 of 2025.
Speaker #2: We've accelerated R&D to focus on growing our technological leadership in all areas, including, but not limited to, unmanned maritime surface vessels, advanced communication systems, electrical, optical, and thermal sensor technology, universal flight controls, AI-based navigation systems, and swarming capabilities.
Speaker #2: To say the least, plenty of other areas that we're spending R&D as well to improve our technologies. General and administrative expenses have grown to 9.2 million for Q3 of 2025, a quarterly increase of 48% over Q2 of 2025.
Speaker #2: This is to support our larger organization, including the establishment of our Blue Ops division and the operational infrastructure required to manage our expanding operations.
Speaker #2: Now onto the balance sheet and cash flow side. The most significant trend across our balance sheet and cash flow metrics is the strengthening foundation we've built we're building for sustained growth and profitability.
Speaker #2: We've ended the quarter with 212.5 million in cash and receivables. This liquidity positioned us well to execute on our SRR obligations to scale our USV division and pursue other strategic growth opportunities.
Speaker #2: The investments we're making and working capital manufacturing capabilities and organizational infrastructure are already generating returns through accelerated revenue growth and enhanced market position. Positioning us for continued success as we scale our operations and capture the tremendous opportunities in the defense drone market.
Speaker #2: Despite the timing shift of revenue, as Jeff talked about, we remain confident in our ability to meet long-term goals. Our production capacity continues to improve with minimal constraints.
Speaker #2: We are on track to scale up drone output to 1,000 units a month by early 2026, and our USV manufacturing is building up, with first deliveries expected in Q2 of 2026.
Speaker #2: On the capital allocation side, we are focused on deploying capital across three key areas: our USV division build-out at Blue Ops, estimated to be a 20 to 25 million dollar investment to fully operationalize the division.
Speaker #2: Strategic investments targeting technologies in swarming, battery tech, AI, and communications, among others. And the third, our facility expansion with completion of our facility expansions in Salt Lake City and Los Angeles, here in the next three to four months, and then also in Georgia with our Blue Ops facility.
Speaker #2: General outlook. Turning our guidance to the full year 2025, as Jeff mentioned, we expect revenues to be between 34.5 to 37.5 million. This represents Q4 revenues between 2022 million or a sequentially quarterly increase of 170%, more than doubling the Q3 revenues.
Speaker #2: This continued strong sequential growth driven by our accelerated Black Widow production ramp, and and thanks to system deliveries, following Blue UAS certification. This guidance reflects our confidence in our production capabilities, with our anticipated manufacturing scaling from 500 to 1,000 drones per month in Q1 of 2026 and our strong order visibility from both existing defense customers and new opportunities generated through our NATO catalog approval.
Speaker #2: Several key factors are driving our optimistic outlook for the remainder of 2025 and into 2026. Our limited rate production contract for Black Widow systems provides a solid foundation of committed revenue.
Speaker #2: While our expanded production capacity position allows us to capture additional opportunities as they emerge, with the launch of Blue Ops opens an entirely new revenue stream and significant potential, giving our pricing expectations between 750,000 to 1.5 million per vessel and a growing demand for autonomous maritime solutions.
Speaker #2: Our strategic partnerships with Palantir and Aero Environment are beginning to generate collaborative opportunities that should contribute meaningfully to our revenue growth trajectory. Market conditions continue to be exceptionally favorable in our solutions.
Speaker #2: Defense spending on autonomous systems is accelerating globally. Driving by evolving geopolitical—excuse me—driven by evolving geopolitical dynamics and the proven effectiveness of drone technology and modern conflicts.
Speaker #2: The emphasis on domestic manufacturing and supply chain security creates substantial competitive advantages for Red Cat, while our international expansion through NATO approval opens up significant new market opportunities.
Speaker #2: We're also seeing increased interest in our maritime capabilities as defense organizations recognize the strategic importance of unmanned surface vessels. Our internal initiatives are positioned to drive us to drive sustained growth beyond the current quarter.
Speaker #2: disciplined execution strategy In closing, we remain focused on expansion and delivering shareholder value. We are pleased with the progress we have made on each of our strategic initiatives and operational performances of the business.
Speaker #2: And with that, happy to answer your questions. So operator Steven, if you would please open up the line for a Q&A.
Speaker #1: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone.
Speaker #1: If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time a question has been addressed and you would like to withdraw your question, please press star then two.
Speaker #1: Analysts are requested to limit themselves to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Austin Bowling with Needham.
Speaker #1: Please go
Speaker #1: ahead. Hey, guys.
Speaker #2: Thanks for taking my question. First one, we're just curious on an update regarding the full rate production order. It sounded like previously you guys were hoping to secure that by the end of the year.
Speaker #2: Is that still kind of the expectation? And any idea on sizing of that
Speaker #2: opportunity? Yeah.
Speaker #3: Hey, Austin. Thanks for the question. Well, we hope that that was going to be by the end of the year, but that was before the shutdown.
Speaker #3: We're still communicating with they're using OTAs from now on, as you probably heard Secretary Hegseth last Friday. We do not know the size yet, but considering that LRIP is closing in on a $40 million size, if you look at the president's budget, it's for 22.50 systems.
Speaker #3: For SRR, which they have at about 148 million now, until budgets are approved, no one knows what that's going to be. But I think the size is going to be dramatically larger from the $40 million basically we got in 2025.
Speaker #2: Okay. Great. Thank you for that. And then just on the boat opportunity, shipping it sounds like in Q2 of next year, what is the type of cadence for revenue opportunity?
Speaker #2: Do you think that could be next year for you
Speaker #2: guys?
Speaker #3: Well, as I said in my
Speaker #3: comments, if we only sold 200 boats, that's 150 million dollars, and that would be the least expensive five-meter boat. We're starting with the seven-meter variant, which has lots of opportunities for missiles, torpedoes, Black Widows, it comes in many, many configurations because it's the bigger size.
Speaker #3: And those will be probably in the mid-range of that 750 to 1.5 million. But we think there's a robust need for shipbuilding as there was also an executive order just like the drone dominance executive order.
Speaker #3: The US is way further behind in shipbuilding and way further behind than the Ukrainians are with their naval capabilities. So we believe it could be a pretty robust revenue stream for us in 2026, a little too early to start giving guidance on that.
Speaker #3: We did have a very successful outing in Portugal in September. And once the first hulls are ready to demo, we're probably booked the first three months of the year giving demos to almost everybody who wants to take our meeting because of our partner that we have in Europe has three years of proven battle-proven—not battle-tested, battle-proven, which is a key differentiator—in the Black Sea.
Speaker #3: So, we expect to get all the meetings. It's going to be up to us to show them how good our brand-new hull is and our capabilities are.
Speaker #3: And we're actually probably going to add a lot more robust capabilities with additional cameras than they are in other countries right now.
Speaker #2: Okay. All right. Well, thank you, guys, for that. Best of luck the rest of the year.
Speaker #3: Great. Thanks.
Speaker #1: question comes from Mike The next Lattimore. With Nordland Capital Markets, please go ahead.
Speaker #4: All right. Great. Yeah. Thanks. I guess on the—you mentioned the 6 to 7-week delay. Just maybe can you provide a little framework on how much revenue recognition was influenced by that?
Speaker #4: Which products, which programs were affected?
Speaker #3: Well, there's a lot of moving pieces to that, Mike. A, because they keep changing the contract from the army. The good news is we're already delivering on it.
Speaker #3: We did a delivery today. As we mentioned, we're going to be doing more than 100% growth in Q4. Basically, the way I would look at it, Mike, is if you took—instead of our production shipping starting in the beginning of July, if you just shifted everything 6 to 7 weeks to the right, nothing has changed with our demand from our customers to—from the previous guidance.
Speaker #3: I would say the only thing that was significantly different that held us up in demand was that we had to do some reconfiguring, which I mentioned publicly about two months ago.
Speaker #3: The flight wave Edge 130 is a great flying machine, but it's not a very robust tool to hand a soldier that's going to be pretty rough with it.
Speaker #3: So the 25 million that we were expecting to have from flight wave this year we decided to rip the Band-Aid off early and start that reconfigure a couple of months ago, as I mentioned on a previous call, to make that Edge 130 a more robust aircraft so that a soldier could handle it and would not be breaking it.
Speaker #3: And so the decision was to just move straight to the Trikon. Instead of messing with the interim version, and that's where we are. That's the only—and we expect the 25 million in 2025 from flight wave which we're not going to get.
Speaker #3: Because of that.
Speaker #4: Okay. Okay. Got it. And it looks like inventory almost doubled sequentially. Is that largely finished goods, Black Widow? What's in there?
Speaker #2: Yeah.
Speaker #2: So that's. I'll let Chris take
Speaker #3: that.
Speaker #2: Yeah. Not finished goods,
Speaker #1: I started production . Now , of course , at the very beginning of any type of process like this . do have a lot of long lead You time , lead time items that have to build up .
Speaker #1: so And as we built that out to prepare for , especially the big ramp starting up in Q1 for these deliveries , we built up that inventory .
Speaker #1: But that's in raw materials and parts . For inventories , as well as those deposits Did you say . that was for for Blue Ops or Black Widow or both ?
Speaker #1: Black widow . So a majority of that Black Widow , smaller portion flight wave , blue ops , we to start we're going having that to ramp up quarter .
Speaker #1: But you won't this next see that yet .
Speaker #2: Got it . And then Okay . just thinking about blue Ops in 26 . What I think you're launching again the the demos like what's the next maybe walk through steps a couple here .
Speaker #2: know , You the which which programs are most . What do you visible think sort of sales cycles are funding cycles are . When do you get some think you might commercial wins ?
Speaker #2: There ?
Speaker #3: Yeah . Well , there's a lot of stuff that's going to be coming up in the 2026 budget for , US shipbuilding fees .
Speaker #3: It's it's it's all out there for the taking . We believe because of our , our our platform is a mature compared to competitors .
Speaker #3: It's old . It's been the three years most successful against the Russian Navy . And that we have actually improved the hulls dramatically .
Speaker #3: Have some of the best boat building capabilities , and we have the capability to scale rapidly with loss of volume coming out of Georgia .
Speaker #3: That factory used to do 850 lake boats per year before we took it over in September . The US visa we're making don't require bathrooms .
Speaker #3: They don't require upholstery . They don't require sound systems . They're much simpler boats to build . There is some great technology in them .
Speaker #3: There's a lot of sensors . There's a lot of comms . We actually just tested our tech stack this week on a traditional commercial boat .
Speaker #3: That's not one of our U.S. V's coming out of the factory, and we were able to drive that boat from pretty much anywhere in the world through Starlink.
Speaker #3: And we've been demoing that in Florida . So our tech stacks getting mature . We're pretty , pretty stoked about that . But we'll be able to give you much stronger updates early in the in Q1 , the the demo in Portugal was very successful for us that people know that there's a US option of the most successful USV in the industry .
Speaker #3: So we we'll be able to update you on where we'll be next year , early next year .
Speaker #2: Thank you. Great.
Speaker #4: Thank you . If you have a question , please press star . Then one . The next question comes from Glenn Martin with Ladenburg Thalmann .
Speaker #4: Please go ahead .
Speaker #5: Hi . Thanks for taking the questions . You know , nice to see the revenue ramp . I imagine there's a lot of moving parts still , gross but the margin was up .
Speaker #5: Year over year . Still sub 10% . Like what's your expectation Chris . In Q4 , given this higher revenue level ? And can you just remind us where you think you'll be when you're at a higher scale ?
Speaker #5: Say , later next year or or whatever that may be ?
Speaker #1: Yeah , absolutely . we do Yeah , expect this margin of 7% to increase up . Continuing on to next quarter , as well as into next year .
Speaker #1: building up So , you know , we're going to expect to see it , right . Probably right around 10% for Q4 then .
Speaker #1: Q1 through the end of next year , And that will continuously increase , projecting towards 20% by the end of next year . This is part of full utilization of the overhead implementing into it and then starting to break down the costs on the supply chain for the first time of ramping up , things are a little bit more expensive , but as we accelerate that , we will be able to bring down the cost of that as well .
Speaker #1: And so that extend , you know , on the low end , 20% by the end of next year , shooting for around 30 to 35% in the long run .
Speaker #3: And Glenn , just Glenn , just to add to that , we have to look at each system as a separate entity when we're looking at , you know , how to get these gross margins up .
Speaker #3: So if you look at the the teal products we had in the past , the teal two went from negative 10% to right around 8 to 10% in its first quarter to 20% .
Speaker #3: Then to plus 30% each quarter . So previous ramping experience was that it will it'll it'll go up nice and steadily quarter after quarter , specifically as the revenue grows like , you know , we're seeing triple digit growth next quarter .
Speaker #3: we And expect , similar growth going forward . But you know , each one each each device is going to have a different margin .
Speaker #3: Flight wave margins are actually higher slightly than the Black Widow . So once we get that switched to the Tricon , that'll probably help our margins on an basis .
Speaker #3: But we look at them per per unit . We have the Black Widow , we have the Triton , we have the fang , and we have the UVs .
Speaker #3: They're all have different margin capabilities in their maturity .
Speaker #5: Great . Thanks comes to the trike . When it and what programs are you terms of targeting in like uptake the for that , for that UAV
Speaker #5: Great . Thanks comes to the trike . When it and what programs are you terms of targeting in like uptake the for that , for that UAV ?
Speaker #3: What's interesting is the demand is Yeah . very strong for the even the edge . 130 but it's currently not to where we want it to be .
Speaker #3: We've done some incredible improvements to it in the last couple of months to more reliable make it adding and features . All the things that we're getting feedback .
Speaker #3: If on there's different , MRR is still lots of wide could look at MRR with the Tricon . There's a lot of different Border things .
Speaker #3: Patrol's really the like Tricon long range with it . We could also turn it into a munition very unique loitering aircraft . Our sales capabilities team love it .
Speaker #3: . list It's one of the fastest US . It's a So in the make if more It it a . drones very well aircraft , .
Speaker #3: We just need more . And there's a lot of things we robust , that to make it flies that the longest on the UAS platform .
Speaker #5: Great . Thanks
Speaker #5: . And then I'm just about like the first part of 26 . I know you're not giving but like if your prior end was , say , and 80 coming in ballpark , now just 40 , although it's lower than that , guidance , but guidance $40 million delta .
Speaker #5: basically 25 of that is flight wave . So the at the low that's is kick you're saying out into Q1 . Is it's going And then And what else backfills into Q1 to rise sequentially , you say , from you're , in your ?
Speaker #3: Well , to
Speaker #3: obviously for 2250 next year , which is probably a
Speaker #3: announcing the Army they would to deliver need a million drones over the is or two . mind ? numbers seem to be number after up next year going , went up .
Speaker #3: We 2026 is going to go up what . So , believe all of we're not going to get into . In got burned by the So .
Speaker #3: We 2026 is going to go up what . So , believe all of we're not going to get into . In got burned by the So severely government through half yet year .
Speaker #3: We 2026 is going to go up what . So , believe all of we're not going to get into . In got burned by the So severely government through half 2026 , we And then a postponements government we're going to shutdown .
Speaker #3: we have our wait until OTA So going to a barometer great for 2026 . know , if you how look at very SSR And , worked out , Skydio got seven , got contract , which is 35 .
Speaker #3: You know , the Black Widow is doing things in Europe now give us . We the Black Widow to incredible end up right dominating this this category of drone .
Speaker #3: The way it's some performing in very contested environments . And we're just going to continue expect Black you Widow give the Army we a a improve the safe and to more So lethal .
Speaker #3: The way it's performing in very contested environments. And we're just going to continue to expect Black Widow to give the Army we a improve the safe and to more. So, in long, long answer to, we're not going to give 2026 guidance with the way this government has been operated.
Speaker #3: As soon as the OTA contract , which , you knows when it's who know , going to be signed , not going to give dates on that .
Speaker #3: I'm starting to learn at least we saw in . But we're we're not yeah , concerned with 2026 being significantly larger than 2025 .
Speaker #3: we just Now up here a little bit . All this revenue that we're talking about to back , almost all of the it is from Black Widow .
Speaker #3: So we're not getting contributions from Blue Ops yet . the And from know , from Flight Wave . We expect them to significantly contribute next But we're ready to give guidance not yet , you .
Speaker #3: So we're we're hoping to do to be able that . know , at the You next year . beginning of .
Speaker #5: Okay . Great . for that color
Speaker #5: Thanks .
Speaker #4: Thank year you . This concludes our question answer session . I would like to turn back the to Jeff Thomson . For and any closing remarks .
Speaker #3: Well , thanks everybody for joining . We're pretty what's going excited about on . We're excited about where we're going with the Army .
Speaker #3: We're excited about all the other groups we'll collaborate with. We're going to continue building and delivering drones. Thanks again for joining us, everybody.
Speaker #4: Thank you . The conference has now concluded