Q2 2026 AeroVironment Inc Earnings Call

December 9, 2025

Operator: Good day, and thank you for standing by. Welcome to the AeroVironment Q2, Q3, Q6 earnings conference call. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Head of Investor Relations, Denise Pacioni. Please proceed.

Speaker #1: To ask a question during the session, you will need to press *11 on your telephone. Please be advised that today's conference is being recorded.

Speaker #1: I would now like to hand the conference over to the Head of Investor Relations, Denise Pacioni. Please proceed.

Speaker #2: Thank you, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's second quarter fiscal year 2026 earnings call. My name is Denise Pacioni, head of Investor Relations for AeroVironment.

Denise Pacioni: Thank you, and good afternoon, ladies and gentlemen. Welcome to AeroVironment Q2, Q3, Q6 earnings call. My name is Denise Pacioni, Head of Investor Relations for AeroVironment. Before we begin, please note that certain information presented on this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC, in particular in the risk factors, and forward-looking statement portions of such filings. Copies are available from the SEC on the AeroVironment website, www.avinc.com, or from our Investor Relations team. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to the Investor section of our website under Events and Presentations.

Speaker #2: Before we begin, please note that certain information presented on this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker #2: These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC, in particular, in the risk factors and forward-looking statement portions of such filings.

Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC, in particular in the risk factors, and forward-looking statement portions of such filings. Copies are available from the SEC on the AeroVironment website, www.avinc.com, or from our Investor Relations team. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to the Investor section of our website under Events and Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, 9 December 2025. T

Speaker #2: Copies are available from the SEC on the AeroVironment website, www.avinc.com, or from our investor relations team. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to the investor section of our website under Events and Presentations.

Speaker #2: The content of this conference call contains time-sensitive information that is accurate only as of today, December 9, 2025. The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

Denise Pacioni: The content of this conference call contains time-sensitive information that is accurate only as of today, 9 December 2025. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. Joining me today from AeroVironment are Chairman, President, and Chief Executive Officer, Mr. Wahid Nawabi, and Executive Vice President and Chief Financial Officer, Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid?

he company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. Joining me today from AeroVironment are Chairman, President, and Chief Executive Officer, Mr. Wahid Nawabi, and Executive Vice President and Chief Financial Officer, Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid?

Speaker #2: Joining me today from AeroVironment are Chairman, President, and Chief Executive Officer Mr. Wahid Nawabi, and Executive Vice President and Chief Financial Officer Mr. Kevin McDonnell.

Speaker #2: We will now begin with remarks from Wahid.

Speaker #2: Nawabi. Wahid. Thank

Speaker #3: You, Denise. Welcome, everyone, to our second quarter fiscal year 2026 earnings conference call. I'll begin by summarizing our quarterly performance, followed by Kevin, who will review our financial results in greater detail, and then discuss guidance for fiscal year 2026.

Wahid Nawabi: Thank you, Denise. Welcome, everyone, to our Q2, Q3, Q6 earnings conference call. I'll begin by summarizing our quarterly performance, followed by Kevin, who will review our financial results in greater detail, and then discuss guidance for Q2, Q3, Q6. After this, Kevin, Denise, and I will take your questions. I'm pleased to report excellent quarter financial results while setting new records in multiple areas of our business. Despite the challenges posed by the elongated US government shutdown, we delivered excellent financial results and achieved several strategic milestones that we believe position AV for strong, sustained growth well into the future. During the quarter, we introduced several innovative products and secured multiple large, long-term contracts, a testament to a recipe for innovation and proof that our strategy is winning. The total ceiling value of new contract awards during Q2 reached $3.5 billion, a historic record achievement by AV.

Speaker #3: After this, Kevin McDonnell, Denise Pacioni, and I will take your questions. I'm pleased to report excellent quarterly financial results, while setting new records in multiple areas of our elongated U.S.

Speaker #3: Despite the challenges posed by the government shutdown, we delivered excellent financial results and achieved several strategic milestones that we believe position AeroVironment (AV) for strong, sustained growth well into the future.

During the quarter, we introduced several innovative products and secured multiple large, long-term contracts, a testament to a recipe for innovation and proof that our strategy is winning. The total ceiling value of new contract awards during Q2 reached $3.5 billion, a historic record achievement by AV. This also resulted in record Q2 bookings of nearly $1.4 billion. These achievements underscore that our strategic investments are delivering results and progressing our business to new heights.

Speaker #3: During the quarter, we introduced several innovative products and secured multiple large, long-term contracts as a testament to a recipe for innovation and proof that our strategy is winning.

Speaker #3: The total ceiling value of new contract awards during Q2 reached $3.5 billion, a historic record achievement by AV. This also resulted in record second quarter bookings of nearly $1.4 billion.

Wahid Nawabi: This also resulted in record Q2 bookings of nearly $1.4 billion. These achievements underscore that our strategic investments are delivering results and progressing our business to new heights. We also made significant progress on multiple programs of record that we believe will solidify our leadership in all of the domains in which we participate: air, land, sea, space, and cyber. With strong top-line growth expected on the horizon, we are executing on our expansion plans to further scale our manufacturing capacity and meet accelerating demand across several of our products and programs. Our proven execution capabilities, combined with the robust pipeline of orders and operational readiness, reinforce our confidence in achieving our industry-leading long-term growth objectives. At the same time, overall, the integration of BlueHalo is exceeding expectations, strengthening our capabilities and positioning AV as the premier next-generation defense tech company.

Speaker #3: These achievements underscore that our strategic investments are delivering results and progressing our business to new heights. We also made significant progress on multiple programs of record that we believe will solidify our leadership in all of the domains in which we participate.

We also made significant progress on multiple programs of record that we believe will solidify our leadership in all of the domains in which we participate: air, land, sea, space, and cyber. With strong top-line growth expected on the horizon, we are executing on our expansion plans to further scale our manufacturing capacity and meet accelerating demand across several of our products and programs. Our proven execution capabilities, combined with the robust pipeline of orders and operational readiness, reinforce our confidence in achieving our industry-leading long-term growth objectives.

Speaker #3: Air, land, sea, space, and cyber. With strong top-line growth expected on the horizon, we are executing on our expansion plans to further scale our manufacturing capacity and meet accelerating demand across several of our products and programs.

Speaker #3: Capabilities combined with the robust pipeline of orders and operational execution readiness reinforce our confidence in achieving our industry-leading long-term growth objectives. At the same time, overall, the integration of Blue Halo is exceeding expectations, strengthening our capabilities and positioning AeroVironment as the premier next-generation defense tech company.

At the same time, overall, the integration of BlueHalo is exceeding expectations, strengthening our capabilities and positioning AV as the premier next-generation defense tech company. Let me summarize our key messages for Q2, Q3 2026, which are awards with a total contract value of $3.5 billion, bolstered bookings to reach an all-time high of nearly $1.4 billion, driven by key program wins that support AV's long-term growth. Second, we also achieved another record Q2 revenue of nearly $473 million.

Speaker #3: Let me summarize our key messages for the second quarter of fiscal year 2026, which are that awards with a total contract value bolstered bookings to reach an all-time high of $3.5 billion, driven by key program wins that support AV's long-term growth.

Wahid Nawabi: Let me summarize our key messages for Q2, Q3 2026, which are awards with a total contract value of $3.5 billion, bolstered bookings to reach an all-time high of nearly $1.4 billion, driven by key program wins that support AV's long-term growth. Second, we also achieved another record Q2 revenue of nearly $473 million. Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. Fourth, we're raising the lower end of our Q2, Q3 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Beyond these strong results, the defense industry is at an inflection point, and AV is not just prepared to lead. We are ahead of the curve, setting the pace for everyone else to follow. Let's not forget, the U.S.

Speaker #3: Second, we also achieved another record second quarter revenue of $ million. Third, we launched several new, nearly $473 million innovative products aligned to our customers' highest priorities and manufacturing capacity to meet accelerated demand.

Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. Fourth, we're raising the lower end of our Q2, Q3 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Beyond these strong results, the defense industry is at an inflection point, and AV is not just prepared to lead. We are ahead of the curve, setting the pace for everyone else to follow.

Speaker #3: And fourth, we're raising the lower end of our fiscal year 2026 revenue guidance and now continue to execute on expanding our expected revenues between $1.95 billion and $2 billion.

Speaker #3: Beyond these strong commitments, let's not forget that the U.S. Department of War is firmly committed to shifting their procurement practices towards agile, commercially available products and capabilities, favoring companies that invest their own capital to develop disruptive solutions at speed while transitioning them to full-rate production and scaling capacity quickly.

Speaker #3: Results show that the defense industry is prepared to lead. We are ahead of the curve, setting the pace for everyone at this inflection point, and AV is not just here to follow.

Let's not forget, the U.S. Department of War is firmly committed to shifting their procurement practices towards agile, commercially available products and capabilities, favoring companies that invest their own capital, develop disruptive solutions at speed, while transitioning them to full-rate production and scaling capacity quickly. This validates the business model AV has embraced not just in the past few years, but over multiple decades. AV's business model and strategy have always been to invest in innovative and disruptive solutions ahead of customer requirements, scale their production rapidly, and deliver decisive advantages that enable our customers to acquire capabilities quickly.

Wahid Nawabi: Department of War is firmly committed to shifting their procurement practices towards agile, commercially available products and capabilities, favoring companies that invest their own capital, develop disruptive solutions at speed, while transitioning them to full-rate production and scaling capacity quickly. This validates the business model AV has embraced not just in the past few years, but over multiple decades. AV's business model and strategy have always been to invest in innovative and disruptive solutions ahead of customer requirements, scale their production rapidly, and deliver decisive advantages that enable our customers to acquire capabilities quickly. Looking ahead, cost-efficient autonomous drones and counter-drone systems enabled by AI and machine learning will define the battlefield. Known for uncrewed aircraft systems and leading AI integration, we believe AV is uniquely positioned to capitalize on this transformation.

Speaker #3: This validates the business model AV has embraced not just in the past few years, but over multiple decades. AV's business model and strategy have always been to invest in innovative and disruptive solutions ahead of customer requirements, scale their production rapidly, and enhance capabilities that enable our customers to acquire quickly.

Looking ahead, cost-efficient autonomous drones and counter-drone systems enabled by AI and machine learning will define the battlefield. Known for uncrewed aircraft systems and leading AI integration, we believe AV is uniquely positioned to capitalize on this transformation. AV Halo, our open architecture software platform, is designed to unify command and control, intelligence analysis, synthetic training, and autonomous targeting across all domains, creating advanced communication among critical assets during conflict.

Speaker #3: Looking to deliver decisive advantages ahead, cost-efficient autonomous drones and counter-drone systems enabled by AI and machine learning will define the battlefield. Known for her uncrewed aircraft systems and leading AI integration, we believe AeroVironment is uniquely positioned to capitalize on this transformation.

Speaker #3: AV Halo, our open architecture software platform, is designed to unify command and control, intelligence analysis, synthetic training, and autonomous targeting across all domains, creating advanced communication among critical assets during conflict.

Wahid Nawabi: AV Halo, our open architecture software platform, is designed to unify command and control, intelligence analysis, synthetic training, and autonomous targeting across all domains, creating advanced communication among critical assets during conflict. By integrating AV Halo into our portfolio and other platforms, we're delivering a powerful hardware-agnostic ecosystem that enhances the speed, autonomy, and interoperability of AV's platforms for our customers. Moreover, we expect that AV Halo's ability to enable competing products to operate on a common command and control software system will play an increasingly crucial role in US defense procurement decisions. Our investment and development in AV Halo is just one example of how AV is ahead of this transformation and is well-positioned within the industry. Our level of internal R&D investment and proactive CapEx strategy enable us to accelerate development and scale production ahead of demand.

By integrating AV Halo into our portfolio and other platforms, we're delivering a powerful hardware-agnostic ecosystem that enhances the speed, autonomy, and interoperability of AV's platforms for our customers. Moreover, we expect that AV Halo's ability to enable competing products to operate on a common command and control software system will play an increasingly crucial role in US defense procurement decisions. Our investment and development in AV Halo is just one example of how AV is ahead of this transformation and is well-positioned within the industry.

Speaker #3: By integrating AV Halo into our portfolio and other platforms, we're delivering a powerful hardware-agnostic ecosystem that enhances the speed, autonomy, and interoperability of AV's platforms for our customers.

Speaker #3: Moreover, we expect that AV Halo's ability to enable competing products to operate on a common command and control software system will play an increasingly crucial role in the U.S.

Speaker #3: Defense procurement decisions. Our investment and example of how AV is ahead of this transformation and is well positioned within the development in AV Halo is just one industry.

Our level of internal R&D investment and proactive CapEx strategy enable us to accelerate development and scale production ahead of demand. Using internal R&D to advance new products allows our technology to outpace our peers and leads to a faster time to market. We believe this core competency is a key differentiator that allows us to stay ahead of our customers' needs. Unlike traditional contractors that wait for contract vehicles before building prototypes, we innovate first, bringing solutions to market faster.

Speaker #3: Our level of internal R&D investment and proactive CAPEX strategy enable us to accelerate development and scale production ahead of demand. Using internal R&D to advance new products allows our technology to outpace our peers and leads to a faster time to market.

Wahid Nawabi: Using internal R&D to advance new products allows our technology to outpace our peers and leads to a faster time to market. We believe this core competency is a key differentiator that allows us to stay ahead of our customers' needs. Unlike traditional contractors that wait for contract vehicles before building prototypes, we innovate first, bringing solutions to market faster. These forward-looking investments are not only fueling the launch of new products but also translating into significant contract wins, reinforcing our ability to capture emerging opportunities. For example, in our autonomous systems segment, our P550 was recently down-selected by the US Army's Long Range Reconnaissance Program, or LRR, estimated to be worth approximately $1 billion. Internal investments made on this Q2 uncrewed solution allowed us to quickly meet the needs and requirements included in the LRR program, and we're confident that our P550 is the best solution for the US.

Speaker #3: We believe this core competency is a key differentiator that allows us to stay ahead of our customers' needs. Unlike traditional contractors that wait for prototypes, we innovate first and bring solutions to market faster.

These forward-looking investments are not only fueling the launch of new products but also translating into significant contract wins, reinforcing our ability to capture emerging opportunities. For example, in our autonomous systems segment, our P550 was recently down-selected by the US Army's Long Range Reconnaissance Program, or LRR, estimated to be worth approximately $1 billion. Internal investments made on this Q2 uncrewed solution allowed us to quickly meet the needs and requirements included in the LRR program, and we're confident that our P550 is the best solution for the US Army.

Speaker #3: These forward-looking investments are not only fueling the launch of new products but also translating into significant contract wins, reinforcing our ability to capture emerging opportunities.

Speaker #3: For example, in our autonomous system segment, our P550 was recently down-selected by the U.S. Army's Long-Range Reconnaissance program, or LRR, estimated to be worth approximately $1 billion.

Speaker #3: Internal investments made on this Group 2 uncrewed solution allowed us to meet requirements included in the LRR program, and we are confident that our P550 is the best solution for the U.S.

Speaker #3: We've also prudently invested to quickly meet the needs of the aircraft system, Jump 20 and Jump 20X, which was recently selected as one of four options on the U.S. Army.

Wahid Nawabi: Army. We've also prudently invested in upgrades to our Q3 uncrewed aircraft system, JUMP 20, and JUMP-20X, which was recently selected as one of four options on the US Navy's basic ordering agreement. This significant achievement allows AV to compete for specific US Navy intelligence, surveillance, and reconnaissance, or ISR, task orders over the next five years in a large and rapidly growing UAS maritime defense market. In addition to these domestic achievements, we're also expanding and experiencing an increase in international demand. Within our autonomous systems segment, we were recently awarded an $874 million sole-source IDIQ contract from the US Army for international sales of our small UAS products to include Raven, Puma AE, and Puma LE. This IDIQ contract vehicle also allows for the sale of our JUMP 20 medium UAS and Titan series of counter-UAS solutions.

We've also prudently invested in upgrades to our Q3 uncrewed aircraft system, JUMP 20, and JUMP-20X, which was recently selected as one of four options on the US Navy's basic ordering agreement. This significant achievement allows AV to compete for specific US Navy intelligence, surveillance, and reconnaissance, or ISR, task orders over the next five years in a large and rapidly growing UAS maritime defense market. In addition to these domestic achievements, we're also expanding and experiencing an increase in international demand.

Speaker #3: Navy's Basic Ordering Agreement. This significant achievement allows AV to compete for specific U.S. Navy Intelligence, Surveillance, and Reconnaissance, or ISR, task orders over the next five years in a large and rapidly growing UAS maritime defense market.

Speaker #3: In addition to these domestic achievements, we're also expanding and experiencing an increase in international demand. Within our autonomous system segment, we were recently awarded an $874 million sole source IDIQ contract from the U.S.

Within our autonomous systems segment, we were recently awarded an $874 million sole-source IDIQ contract from the US Army for international sales of our small UAS products to include Raven, Puma AE, and Puma LE. This IDIQ contract vehicle also allows for the sale of our JUMP 20 medium UAS and Titan series of counter-UAS solutions. Our strategy is driving tangible results, which is evident in the successful product launches this quarter. We recently unveiled several new offerings, including our next generation of Switchblade loitering munitions with our Switchblade 600 Block 2, Switchblade 400, and Switchblade 300 Block 20.

Speaker #3: Army for international sales of our small UAS products to include Raven, Puma AE, and Puma LE. This IDIQ contract vehicle also allows for the sale of our Jump 20 medium UAS and Titan series solutions.

Speaker #3: Our counter-UAS results, which are evident in the successful strategy, are driving tangible product launches this quarter. We recently unveiled several new offerings, including our next generation of Switchblade loading munitions, with our Switchblade 600 Block II, Switchblade 400, and Switchblade 300 Block 20.

Wahid Nawabi: Our strategy is driving tangible results, which is evident in the successful product launches this quarter. We recently unveiled several new offerings, including our next generation of Switchblade loitering munitions with our Switchblade 600 Block 2, Switchblade 400, and Switchblade 300 Block 20. These products were mostly internally funded and developed quickly, helping to expand the Switchblade product line and create long-endurance, multi-domain, and anti-armor solutions, ensuring warfighters maintain tactical overmatch in contested environments. We also debuted our next-generation VAPR compact long-endurance helicopter, or VAPR CLE. This Q2 VTOL UAV is fully autonomous and can deliver up to two hours of flight, which is double the endurance of typical Q2 quadrotor UAV platforms. Our newly integrated NVIDIA Orin onboard computer makes the VAPR CLE fully autonomous and enables automatic target recognition through AV Halo Vision computer vision software and AV Halo Wizard artificial intelligence machine learning AI/ML processing suite.

These products were mostly internally funded and developed quickly, helping to expand the Switchblade product line and create long-endurance, multi-domain, and anti-armor solutions, ensuring warfighters maintain tactical overmatch in contested environments. We also debuted our next-generation VAPR compact long-endurance helicopter, or VAPR CLE. This Q2 VTOL UAV is fully autonomous and can deliver up to two hours of flight, which is double the endurance of typical Q2 quadrotor UAV platforms.

Speaker #3: These products were mostly internally funded and developed quickly, helping to expand the Switchblade product line and create long-endurance, multi-domain anti-armor solutions, ensuring warfighters maintain tactical overmatch in contested environments.

Speaker #3: We also debuted our next-generation vapor compact long-endurance helicopter, or Vapor CLE. This Group 2 VTOL UAV is fully autonomous and can deliver up to two hours of flight, which is double the endurance of typical Group 2 quad-rotor UAV platforms.

Our newly integrated NVIDIA Orin onboard computer makes the VAPR CLE fully autonomous and enables automatic target recognition through AV Halo Vision computer vision software and AV Halo Wizard artificial intelligence machine learning AI/ML processing suite. On our last earnings call, we discussed the significance of our software solution, AV Halo. Since then, we have announced that AV was awarded the US Army's contract for Human Machine Integrated Formation, or HMIF program.

Speaker #3: Our newly integrated NVIDIA Orin onboard computer makes the Vapor CLE fully autonomous and enables automatic target recognition through AV Halo vision computer vision software and the AV Halo Wizard artificial intelligence machine learning (AI/ML) processing suite.

Speaker #3: On our last earnings call, we discussed the significance of our software solution, AV Halo. Since then, we've announced that AV was awarded the U.S.

Wahid Nawabi: On our last earnings call, we discussed the significance of our software solution, AV Halo. Since then, we have announced that AV was awarded the US Army's contract for Human Machine Integrated Formation, or HMIF program. This award accelerates fielding of multi-domain robotic formations using AV's unified interface of command and control, tactical awareness, and autonomy solutions at the tactical edge. As part of this win, AV is going to be the lead software and system integrator for robotic systems on the edge of the battlefield. This award also validates the strength of our approach to software solutions, common controllers, and user interfaces, and underscores the Army's confidence in AV's ability to deliver mission-critical solutions.

Speaker #3: For the Human-Machine Integrated Formation, or HMIF program, this Army contract award accelerates the fielding of multi-domain robotic formations using AV's unified interface of command and control, tactical awareness, and autonomy solutions at the tactical edge.

This award accelerates fielding of multi-domain robotic formations using AV's unified interface of command and control, tactical awareness, and autonomy solutions at the tactical edge. As part of this win, AV is going to be the lead software and system integrator for robotic systems on the edge of the battlefield. This award also validates the strength of our approach to software solutions, common controllers, and user interfaces, and underscores the Army's confidence in AV's ability to deliver mission-critical solutions.

Speaker #3: Win, AV is going to be the lead software and system integrator for robotic systems on the edge of the battlefield.

Speaker #3: This award also validates the strength of our approach to software solutions, common controllers, and user interfaces, and underscores the Army's confidence in AV's ability to deliver solutions.

Speaker #3: We also just released two new products from the deliver mission-critical AV Halo suite, including AV Halo Cortex, a next-generation intelligence fusion and analysis environment, and Mentor, a warfighter readiness suite that leans on virtual and augmented reality weapons training and mission rehearsal.

Wahid Nawabi: We also just released two new products from the AV Halo suite, including AV Halo Cortex, a next-generation intelligence fusion and analysis environment, and AV Halo Mentor, a warfighter-readiness suite that leans on virtual and augmented reality weapons training and mission rehearsal. AV Halo will continue to roll out more products and offerings that position AV as the core and leading developer in this space. Furthermore, we recently announced a collaboration with OpenJAUS, or OpenJAWS. OpenJAUS is an open architecture for software framework that allows robots, drones, missiles, and ground vehicles to speak the same language. This integration extends AV Halo compatibility to seamlessly incorporate robotics, allowing original equipment manufacturers to integrate their platforms faster and more easily. This collaboration strengthens AV's role as a driver and leader of the industry's push towards interoperability.

We also just released two new products from the AV Halo suite, including AV Halo Cortex, a next-generation intelligence fusion and analysis environment, and AV Halo Mentor, a warfighter-readiness suite that leans on virtual and augmented reality weapons training and mission rehearsal. AV Halo will continue to roll out more products and offerings that position AV as the core and leading developer in this space. Furthermore, we recently announced a collaboration with OpenJAUS, or OpenJAWS. OpenJAUS is an open architecture for software framework that allows robots, drones, missiles, and ground vehicles to speak the same language.

Speaker #3: AV Halo will continue to roll out more products and offerings that position AV as the core and leading developer in this space. Furthermore, we recently announced a collaboration with OpenJAUS, or Open JAWS.

Speaker #3: Open JAWS is an open architecture for a software framework that allows robots, drones, missiles, and ground vehicles to speak the same language. This integration extends AV Halo compatibility to seamlessly incorporate robotics, allowing original equipment manufacturers to integrate their platforms faster and more easily.

This integration extends AV Halo compatibility to seamlessly incorporate robotics, allowing original equipment manufacturers to integrate their platforms faster and more easily. This collaboration strengthens AV's role as a driver and leader of the industry's push towards interoperability. In addition, AV won several key awards in our space, cyber, and directed energy segment with critical new contracts in laser communications, space-related satellite communications, and directed energy. For example, AV received a $240 million contract for our long-haul laser communication terminals, one of the largest to ever be awarded in this category.

Speaker #3: This collaboration strengthens AV's role as a driver and leader of the industry's push toward interoperability. In addition, AV seeks several key awards in our space cyber and directed energy segment, along with critical new contracts in laser communications and directed energy.

Wahid Nawabi: In addition, AV won several key awards in our space, cyber, and directed energy segment with critical new contracts in laser communications, space-related satellite communications, and directed energy. For example, AV received a $240 million contract for our long-haul laser communication terminals, one of the largest to ever be awarded in this category. This disruptive innovation is moving from lab to orbit, a critical step for AV and the industry. Long-haul laser communications use precision optical links to move enormous amounts of data between satellites faster, more securely, and without the vulnerabilities of traditional radio frequency or RF signals. This capability is critical because it creates a resilient high-bandwidth backbone for future space networks, ensuring warfighters and decision-makers get the right information instantly, even in contested environments. This win continues to push AV to the center of innovation in space.

Speaker #3: For example, AV received a $240 million contract for our long-haul laser communication terminals, one of the largest to ever be awarded in this category.

This disruptive innovation is moving from lab to orbit, a critical step for AV and the industry. Long-haul laser communications use precision optical links to move enormous amounts of data between satellites faster, more securely, and without the vulnerabilities of traditional radio frequency or RF signals. This capability is critical because it creates a resilient high-bandwidth backbone for future space networks, ensuring warfighters and decision-makers get the right information instantly, even in contested environments. This win continues to push AV to the center of innovation in space.

Speaker #3: This disruptive innovation is moving from the lab to orbit, a critical step for AV and the industry. Long-haul laser communications use precision optical links to move enormous amounts of data between satellites faster and more securely, and without the vulnerabilities of traditional radio frequency (RF) signals.

Speaker #3: This capability is critical because it creates a resilient high-bandwidth backbone for future space networks, ensuring warfighters and decision-makers get the right information instantly, even in contested environments.

Speaker #3: This win continues to push AeroVironment to the center of innovation in space. Additionally, AeroVironment secured a new firm fixed-price option for two Badger phased array systems under the SCAR, or Satellite Communication Augmentation Resource program.

Wahid Nawabi: Additionally, AV secured a new firm fixed-price option for two Badger phased-array systems under the SCAR, or Satellite Communication Augmentation Resource Program. This program represents a tremendous growth opportunity for AV as more Badger systems move into production. Lastly, AV was awarded a contract valued at $499 million by the US Air Force Research Laboratory to develop material technology and deploy protective solutions to the front lines to guard warfighters against exposure to harmful electromagnetic radiation. Work under this large program, known as HELMSMAN, will help deter against directed energy strikes in the future. We continue to set the standard in advanced protective technologies and directed energy defense, positioning AV as a clear leader in safeguarding warfighters against emerging threats. Further, our disruptive solutions continue to position AV as a leader in next-generation defense. From our family of switchblade loitering munitions to advanced counter-UAS solutions, we're redefining the battle space.

Additionally, AV secured a new firm fixed-price option for two Badger phased-array systems under the SCAR, or Satellite Communication Augmentation Resource Program. This program represents a tremendous growth opportunity for AV as more Badger systems move into production. Lastly, AV was awarded a contract valued at $499 million by the US Air Force Research Laboratory to develop material technology and deploy protective solutions to the front lines to guard warfighters against exposure to harmful electromagnetic radiation. Work under this large program, known as HELMSMAN, will help deter against directed energy strikes in the future.

Speaker #3: This program represents a tremendous growth opportunity for AV as more Badger systems move into production. Lastly, AV was awarded a contract valued at $499 million by the U.S.

Speaker #3: The Air Force Research Laboratory will develop material technology and deploy protective solutions to the front lines to guard warfighters against exposure to harmful electromagnetic radiation.

Speaker #3: Work under Helmsman; will this large program help deter against directed energy strikes in the future? We continue to set the standard in advanced protective technologies and directed energy defense, positioning AeroVironment as a clear leader in safeguarding warfighters against emerging threats.

We continue to set the standard in advanced protective technologies and directed energy defense, positioning AV as a clear leader in safeguarding warfighters against emerging threats. Further, our disruptive solutions continue to position AV as a leader in next-generation defense. From our family of switchblade loitering munitions to advanced counter-UAS solutions, we're redefining the battle space. We have unseated incumbents with our LOCUST laser weapon system and secured key wins like Freedom Eagle One, or FE One, delivering cost-effective kinetic counter-UAS solutions for Q3 and Q4 drones and beyond.

Speaker #3: Further, our disruptive solutions continue to position AV as a leader in next-generation defense. From our family of Switchblade loitering munitions to advanced counter-UAS solutions, we're redefining the battlespace.

Speaker #3: We have unceded incumbents with our Locust Laser Weapon System and secured key wins like Freedom Eagle One, or FE One, delivering cost-effective kinetic counter-UAS solutions for Group 3 and 4 drones and beyond.

Wahid Nawabi: We have unseated incumbents with our LOCUST laser weapon system and secured key wins like Freedom Eagle One, or FE One, delivering cost-effective kinetic counter-UAS solutions for Q3 and Q4 drones and beyond. With our AI and machine learning-driven platforms, we believe AV continues to set the industry standard, positioning us to fully capitalize on the generational opportunities ahead. During the quarter, we continue to form additional strategic alliances and collaborations that will help AV expand domestically and internationally. In September, we signed a memorandum of understanding with Taiwan's National Chung-Shan Institute of Science and Technology, or NCSIST, to collaborate on autonomous systems and technology to support Taiwan's defense and security needs. We also signed a memorandum of understanding with Korean Air to advance medium uncrewed aircraft systems to the Republic of South Korea.

With our AI and machine learning-driven platforms, we believe AV continues to set the industry standard, positioning us to fully capitalize on the generational opportunities ahead. During the quarter, we continue to form additional strategic alliances and collaborations that will help AV expand domestically and internationally. In September, we signed a memorandum of understanding with Taiwan's National Chung-Shan Institute of Science and Technology, or NCSIST, to collaborate on autonomous systems and technology to support Taiwan's defense and security needs.

Speaker #3: With our AI and machine learning-driven platforms, we believe AeroVironment continues to set the industry standard, positioning us to fully capitalize on the generational opportunities ahead.

Speaker #3: During the quarter, we continued to form additional strategic alliances and collaborations that will help AV expand domestically and internationally. In September, we signed a memorandum of understanding with Taiwan's National Chungshan Institute of Science and Technology (NCSIST) to collaborate on autonomous systems and technology to support Taiwan's defense and security needs.

We also signed a memorandum of understanding with Korean Air to advance medium uncrewed aircraft systems to the Republic of South Korea. Both of these agreements underscore our expanding international presence and steadfast commitment to providing flexible, mission-ready solutions for our customers. Both agreements are centered around AV's Jump 20 and Jump 20X systems. These systems provide the kind of operational versatility that continues to grow in popularity in international markets.

Speaker #3: We also signed a memorandum of understanding with Korean Air to advance medium and crude aircraft systems to the Republic of South Korea. Both of underscore our expanding international presence these agreements and steadfast commitment to providing flexible mission-ready solutions for our customers.

Wahid Nawabi: Both of these agreements underscore our expanding international presence and steadfast commitment to providing flexible, mission-ready solutions for our customers. Both agreements are centered around AV's Jump 20 and Jump 20X systems. These systems provide the kind of operational versatility that continues to grow in popularity in international markets. We also announced a collaboration with Grand Sky to establish the foundation for a Golden Dome for America Limited Area Defense Architecture at Grand Forks Air Force Base in North Dakota. This collaboration is significant as it marks the first deployment of AV's critical counter-UAS solution set to secure a US Air Force Base, creating a model that can be replicated across other critical US national security sites. As the demand for our innovative offerings accelerates, we recognize the critical importance of scaling quickly.

Speaker #3: Both agreements are centered around AV's Jump20 and Jump20X systems. These systems provide the kind of operational versatility that continues to grow in popularity in international markets.

We also announced a collaboration with Grand Sky to establish the foundation for a Golden Dome for America Limited Area Defense Architecture at Grand Forks Air Force Base in North Dakota. This collaboration is significant as it marks the first deployment of AV's critical counter-UAS solution set to secure a US Air Force Base, creating a model that can be replicated across other critical US national security sites. As the demand for our innovative offerings accelerates, we recognize the critical importance of scaling quickly. Since last year, we have been focused on securing a new facility in Salt Lake City to expand our switchblade manufacturing further.

Speaker #3: We also announced a collaboration with Grandsky to establish the foundation for a Golden Dome for America Limited Area Defense Architecture at Grand Forks Air Force Base in North Dakota.

Speaker #3: This collaboration is significant as it marks the first deployment of AV's critical counter-UAS solution set to secure a U.S. Air Force base, creating a model that can be replicated across other critical U.S.

Speaker #3: National security sites. As the demand for our innovative offerings accelerates, we recognize the critical importance of scaling quickly. Since last year, we have been focused on securing a new facility in Salt Lake City to expand our Switchblade manufacturing further.

Wahid Nawabi: Since last year, we have been focused on securing a new facility in Salt Lake City to expand our switchblade manufacturing further. Plans are progressing on a 100,000-sq-ft facility that will allow for multiple switchblade lines and provide additional capacity. This new factory has the potential capacity to produce over $2 billion worth of switchblades or other AV products per year. We anticipate this factory to be operational about a year from now. Beyond expanding our own footprint, we're also actively strengthening our supply chain to support anticipated demand, continuing to stay ahead of the market. As part of our distributed approach to manufacturing for resiliency and risk diversification, we now have manufacturing sites operating across 12 different states, reinforcing our ability to scale rapidly and reliably. In addition to scaling operations, we're transforming the defense technology landscape through our acquisition of BlueHalo.

Plans are progressing on a 100,000-sq-ft facility that will allow for multiple switchblade lines and provide additional capacity. This new factory has the potential capacity to produce over $2 billion worth of switchblades or other AV products per year. We anticipate this factory to be operational about a year from now. Beyond expanding our own footprint, we're also actively strengthening our supply chain to support anticipated demand, continuing to stay ahead of the market. As part of our distributed approach to manufacturing for resiliency and risk diversification, we now have manufacturing sites operating across 12 different states, reinforcing our ability to scale rapidly and reliably.

Speaker #3: Plans are progressing on a 100,000 square-foot facility that will allow for multiple Switchblade lines and provide additional capacity. This new factory has the potential capacity to produce over $2 billion worth of Switchblades or other AV products per year.

Speaker #3: We anticipate this factory to be operational about a year from now. Beyond expanding our own footprint, we're also actively strengthening our supply chain to support anticipated demand, continuing to stay ahead of the market.

Speaker #3: As part of our distributed approach to manufacturing for resiliency and risk diversification, we now have manufacturing sites operating across 12 different states, reinforcing our ability to scale rapidly and reliably.

In addition to scaling operations, we're transforming the defense technology landscape through our acquisition of BlueHalo. We are already realizing meaningful synergies from the BlueHalo acquisition, which Kevin will discuss in further detail. Together, we're building next-generation platforms that fuse counter-UAS, space technologies, directed energy, electronic warfare, cyber, and integrated software solutions, creating a suite of capabilities unmatched in the industry. This combination accelerates innovation and continues to position AV as this disruptor driving rapid change in a market hungry for speed, agility, and advanced solutions.

Speaker #3: In addition to scaling operations, we're transforming the defense technology landscape through our acquisition of Blue Halo. We are already realizing meaningful synergies from the Blue Halo acquisition, which Kevin will discuss in further detail.

Wahid Nawabi: We are already realizing meaningful synergies from the BlueHalo acquisition, which Kevin will discuss in further detail. Together, we're building next-generation platforms that fuse counter-UAS, space technologies, directed energy, electronic warfare, cyber, and integrated software solutions, creating a suite of capabilities unmatched in the industry. This combination accelerates innovation and continues to position AV as this disruptor driving rapid change in a market hungry for speed, agility, and advanced solutions. We are reshaping expectations and setting a new standard for what can be delivered to the US and our allied forces. Before turning the call over to Kevin, who will provide more financial details on our second quarter results, let me conclude with the following comments. Despite a challenging environment, we delivered a strong quarter.

Speaker #3: Together, we're building next-generation platforms that fuse counter-UAS, space technologies, directed energy, electronic warfare, cyber, and integrated software solutions, creating a suite of capabilities unmatched in the industry.

Speaker #3: This combination accelerates innovation and continues to position AV as this disruptor driving rapid change in a market hungry for speed, agility, and advanced solutions.

We are reshaping expectations and setting a new standard for what can be delivered to the US and our allied forces. Before turning the call over to Kevin, who will provide more financial details on our second quarter results, let me conclude with the following comments. Despite a challenging environment, we delivered a strong quarter. Our continued investment in R&D and capacity expansion is translating into strong growth, key program wins, and positioning AV for even more growth in the coming years. We recognize there is a generational shift in the US Department of Defense's procurement strategy and product needs.

Speaker #3: We are reshaping expectations and setting a new standard for what can be delivered to the U.S. and our allied forces. Before turning the call over to Kevin, who will provide more financial details on our second quarter results, let me conclude with the following comments.

Speaker #3: Despite a challenging environment, we delivered a strong quarter. Our continued investment in R&D and capacity expansion is translating into strong growth, key program wins, and positioning AV for even more growth in the coming years.

Wahid Nawabi: Our continued investment in R&D and capacity expansion is translating into strong growth, key program wins, and positioning AV for even more growth in the coming years. We recognize there is a generational shift in the US Department of Defense's procurement strategy and product needs. Our offerings are designed to meet warfighter requirements, and our strategy is fully aligned with these new practices. We're executing on manufacturing expansion, and we are confident that we can meet increased demand. Integration of BlueHalo is progressing well, and this acquisition is helping to establish AV as a next-generation defense technology company with unmatched capabilities across multiple domains. With that, I would like to now turn the call over to Kevin McDonnell for a review of our Q2 financials. Kevin. Thank you, Wahid.

Speaker #3: We recognize there is a generational shift in the U.S. Department of Defense's procurement strategy and product needs. Our offerings are designed to meet warfighter requirements, and our strategy is fully aligned with these new practices.

Our offerings are designed to meet warfighter requirements, and our strategy is fully aligned with these new practices. We're executing on manufacturing expansion, and we are confident that we can meet increased demand. Integration of BlueHalo is progressing well, and this acquisition is helping to establish AV as a next-generation defense technology company with unmatched capabilities across multiple domains. With that, I would like to now turn the call over to Kevin McDonnell for a review of our Q2 financials. Kevin.

Speaker #3: We're executing on manufacturing expansion and are confident that we can meet increased demand. The integration of Blue Halo is progressing well in this acquisition, helping to establish AeroVironment as a next-generation defense technology company with unmatched capabilities across multiple domains.

Speaker #3: With that, I would like to now turn the call over to Kevin McDonnell for a review of our second quarter financials.

Speaker #3: With that, I would like to now turn the call over to Kevin McDonnell for a review of our second quarter financials. Kevin.

Kevin McDonnell: Thank you, Wahid. Today, I'll be reviewing the highlights of our second quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. I will start by commenting on our results for the quarter and then turn to guidance for the remainder of FY26. While this quarter presented challenges in terms of the US government shutdown and our transition to new operational systems, we are very pleased with the continued business momentum and, more importantly, our revenue and adjusted EBITDA outlook for the year remains in the same range despite some of the challenges in Q2.

Speaker #2: Today, I'll be reviewing the highlights of our second quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website.

Wahid Nawabi: Today, I'll be reviewing the highlights of our second quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. I will start by commenting on our results for the quarter and then turn to guidance for the remainder of FY26. While this quarter presented challenges in terms of the US government shutdown and our transition to new operational systems, we are very pleased with the continued business momentum and, more importantly, our revenue and adjusted EBITDA outlook for the year remains in the same range despite some of the challenges in Q2. Next, I'd like to draw your attention to slide 17 of the earnings presentation, which sets forth the definitions for our customer contracting activity. Going forward, each quarter, we'll present and report the total contract awards, bookings, funded backlog, and unfunded backlog in the quarter.

Speaker #2: I will start by commenting on our results for the quarter and then turn to guidance for the remainder of FY26. While this quarter presented challenges in terms of the U.S.

Speaker #2: Government shutdown and our transition to new operational systems, we are very pleased with the continued business momentum and, more importantly, our revenue and adjusted EBITDA outlook for the year remains in the same range despite some of the challenges in Q2.

Next, I'd like to draw your attention to slide 17 of the earnings presentation, which sets forth the definitions for our customer contracting activity. Going forward, each quarter, we'll present and report the total contract awards, bookings, funded backlog, and unfunded backlog in the quarter. Now, I'll highlight some of that customer contract activity in the quarter. As Wahid mentioned, we earned awards with a total ceiling of $3.5 billion, and we achieved $1.4 billion of bookings and ended the quarter with $1.1 billion of funded backlog and $1.8 billion of unfunded backlog.

Speaker #2: Next, I'd like to draw your attention to slide 17 of the earnings presentation, which sets forth a definition for our customer contracting activity. Going forward, each quarter, we'll present the report, the total contract awards, bookings, funded backlog, and unfunded backlog in the quarter.

Speaker #2: Now, I'll highlight some of that customer contract activity in the quarter. As Wahid mentioned, we earned awards with a total ceiling of $3.5 billion, and we achieved $1.4 billion of bookings. We ended the quarter with $1.1 billion of funded backlog and $1.8 billion of unfunded backlog.

Wahid Nawabi: Now, I'll highlight some of that customer contract activity in the quarter. As Wahid mentioned, we earned awards with a total ceiling of $3.5 billion, and we achieved $1.4 billion of bookings and ended the quarter with $1.1 billion of funded backlog and $1.8 billion of unfunded backlog. We're very pleased that the US Department of War contract activity continued progressing despite the shutdown, and we view this as a testament to the importance of the programs we're involved in. Some of the recent key awards are highlighted on slide 10 of the earnings presentation. Both segments captured multiple large awards during the quarter. As Wahid mentioned in his remarks, revenue totaled $472.5 million in the second quarter, which represented a 151% increase over the prior year, as reported, or a 9% increase on a pro forma basis. Legacy AV organic growth was 21% in the second quarter.

We're very pleased that the US Department of War contract activity continued progressing despite the shutdown, and we view this as a testament to the importance of the programs we're involved in. Some of the recent key awards are highlighted on slide 10 of the earnings presentation. Both segments captured multiple large awards during the quarter. As Wahid mentioned in his remarks, revenue totaled $472.5 million in the second quarter, which represented a 151% increase over the prior year, as reported, or a 9% increase on a pro forma basis. Legacy AV organic growth was 21% in the second quarter.

Speaker #2: We are very pleased that the U.S. Department of War contract activity continued progressing despite the shutdown, and we view this as a testament to the importance of the programs we're involved in.

Speaker #2: Some of the recent key awards are highlighted on slide 10 of the earnings presentation. Both segments captured multiple large awards during the quarter. As Wahid mentioned in his remarks, total revenue totaled $472.5 million in the second quarter, which represented a 151% increase over the prior year as reported, or a 9% increase on a pro forma basis.

Speaker #2: Legacy AV organic growth was 21% in the second quarter. Slides 6 and 7 of the earnings presentation show the second quarter and the year-to-date revenue by operating group for each of our two segments compared to pro forma FY25 revenue.

Slide 6 and 7 of the earnings presentation show the second quarter and the year-to-date revenue by operating group for each of our two segments compared to pro forma FY25 revenue. The AXS segment recognized $302 million in revenue in the quarter, which represented a 15.7% increase over the FY25 pro forma revenues. Precision strike and counter-UAS products led revenue growth for the segment with nearly a 38% increase compared to the pro forma FY25 second quarter results. Strong Switchblade 600 and Titan sales led to the growth in this operating group.

Wahid Nawabi: Slide 6 and 7 of the earnings presentation show the second quarter and the year-to-date revenue by operating group for each of our two segments compared to pro forma FY25 revenue. The AXS segment recognized $302 million in revenue in the quarter, which represented a 15.7% increase over the FY25 pro forma revenues. Precision strike and counter-UAS products led revenue growth for the segment with nearly a 38% increase compared to the pro forma FY25 second quarter results. Strong Switchblade 600 and Titan sales led to the growth in this operating group. Uncrewed systems, including both our small UAS and medium UAS products, improved more than 8% from the pro forma results from the same quarter last year. Uncrewed systems without Ukraine revenues grew more than 50% year-over-year, driven by strong Jump 20 revenue increase.

Speaker #2: The AXS segment recognized $302 million in revenue in the quarter, which represented a 15.7% increase over the FY25 pro forma revenues. Precision Strike and counter-UAS products led revenue growth for the segment, with nearly a 38% increase compared to the pro forma FY25 second quarter results.

Speaker #2: Strong Switchblade 600 and Titan sales led to the growth in this operating group. Uncrewed systems, including both our small UAS and medium UAS products, improved more than 8% from the pro forma results from the same quarter last year.

Uncrewed systems, including both our small UAS and medium UAS products, improved more than 8% from the pro forma results from the same quarter last year. Uncrewed systems without Ukraine revenues grew more than 50% year-over-year, driven by strong Jump 20 revenue increase. The space, cyber, and directed energy segment recognized $171 million of revenue in the quarter, which is similar to the pro forma results from the same quarter last year. The space and directed energy products grew more than 20% in the quarter versus the prior year, with the LOCUST directed energy counter-UAS growth being one of the key drivers.

Speaker #2: Uncrewed systems, excluding Ukraine revenues, grew more than 50% year-over-year, driven by a strong 20% revenue increase. The space, cyber, and directed energy segment recognized $171 million of revenue in the quarter, which is similar to the pro forma results from the same quarter last year.

Wahid Nawabi: The space, cyber, and directed energy segment recognized $171 million of revenue in the quarter, which is similar to the pro forma results from the same quarter last year. The space and directed energy products grew more than 20% in the quarter versus the prior year, with the LOCUST directed energy counter-UAS growth being one of the key drivers. As Wahid mentioned earlier, this segment also received several large contracts this past quarter, to include a significant contract for our long-haul laser communications and two Badgers for the US Space Force's SCAR program. Cyber and mission systems showed a decline in revenue, largely a result of programs that were discontinued and was negatively impacted by the government shutdown. As mentioned earlier, this segment had a strong quarter with new contracts with a nearly $500 million HELMSMAN award, among others.

Speaker #2: The space and directed energy products grew more than 20% in the quarter compared to the prior year, with the Locust directed energy counter-UAS growth being one of the key drivers.

As Wahid mentioned earlier, this segment also received several large contracts this past quarter, to include a significant contract for our long-haul laser communications and two Badgers for the US Space Force's SCAR program. Cyber and mission systems showed a decline in revenue, largely a result of programs that were discontinued and was negatively impacted by the government shutdown. As mentioned earlier, this segment had a strong quarter with new contracts with a nearly $500 million HELMSMAN award, among others.

Speaker #2: As Wahid mentioned earlier, this segment also received several large contracts this past quarter, including a significant contract for our long-haul laser communications and two Badgers for the U.S.

Speaker #2: Space Force's SCAR program showed a decline in revenue largely as a result of programs that were discontinued and was negatively impacted by the government shutdown.

Speaker #2: As mentioned earlier, this segment had a strong quarter with new contracts, including a nearly $500 million Helmsman award, among others. Moving on to gross margins.

Moving on to gross margins, Slide 13 shows the adjusted product and service gross margin, including reconciliations to GAAP gross margin. Second quarter overall adjusted gross margins were 27% versus 41% in the second quarter of FY25. As noted, the business landscape of the combined new company has changed significantly, with a higher service mix and several products in the early stages of maturation. In the second quarter, it did present some additional challenges to adjust the gross margin. We went live with our Oracle Fusion ERP system upgrade in the quarter.

Wahid Nawabi: Moving on to gross margins, Slide 13 shows the adjusted product and service gross margin, including reconciliations to GAAP gross margin. Second quarter overall adjusted gross margins were 27% versus 41% in the second quarter of FY25. As noted, the business landscape of the combined new company has changed significantly, with a higher service mix and several products in the early stages of maturation. In the second quarter, it did present some additional challenges to adjust the gross margin. We went live with our Oracle Fusion ERP system upgrade in the quarter. As a result, we experienced some operational inefficiencies and one-time costs related to the go-live. With that said, we've made a major leap forward in our operational systems as we transition to the cloud to support a multi-billion dollar company.

Speaker #2: Slide 13 shows the adjusted product and service gross margin, including reconciliations to GAAP gross margin. Second quarter overall adjusted gross margins were 27% versus 41% in the second quarter of FY25.

Speaker #2: As noted, the business landscape of the combined new company has changed significantly, with a higher service mix and several products in the early stages of maturation.

Speaker #2: In the second quarter, it did present some additional challenges to adjusted gross margin. We went live with our Oracle Fusion ERP system upgrade in the quarter.

As a result, we experienced some operational inefficiencies and one-time costs related to the go-live. With that said, we've made a major leap forward in our operational systems as we transition to the cloud to support a multi-billion dollar company. In addition, we saw an unfavorable service product mix and unfavorable product mix, partially as a result of the government shutdown caused by delays in FMS shipments. In addition, we lost revenues in our space, cyber, and directed energy businesses during the shutdown. However, we believe the adjusted gross margins are improving Q3 and be in the high 30s by Q4.

Speaker #2: As a result, we experienced some operational inefficiencies and one-time costs related to the go-live. With that said, we've made a major leap forward in our operational systems as we transition to the cloud to support a multi-billion-dollar company.

Speaker #2: In addition, we saw an unfavorable service product mix and an unfavorable product mix, partially as a result of the government shutdown caused by delays in FMS shipments.

Wahid Nawabi: In addition, we saw an unfavorable service product mix and unfavorable product mix, partially as a result of the government shutdown caused by delays in FMS shipments. In addition, we lost revenues in our space, cyber, and directed energy businesses during the shutdown. However, we believe the adjusted gross margins are improving Q3 and be in the high 30s by Q4. We are maintaining our full-year outlook for adjusted gross margins in the low 30s. Moving on to operating expenses. Adjusted SG&A, which is net of intangible amortization and deal integration costs, was $66.1 million versus $33.2 million in the prior year. The increase is largely a result of a combination with BlueHalo. As a percentage of revenue, adjusted SG&A in the quarter was 14% of revenue versus 17.6% in FY25.

Speaker #2: In addition, we lost revenues in our Space Cyber and Directory Energy businesses during the shutdown. However, we believe the adjusted gross margins are improving in Q3 and will be in the high 30s by Q4.

We are maintaining our full-year outlook for adjusted gross margins in the low 30s. Moving on to operating expenses. Adjusted SG&A, which is net of intangible amortization and deal integration costs, was $66.1 million versus $33.2 million in the prior year. The increase is largely a result of a combination with BlueHalo. As a percentage of revenue, adjusted SG&A in the quarter was 14% of revenue versus 17.6% in FY25. Again, these adjusted SG&A levels represent a shift in the business model, and we expect to end the year in the 12% to 13% range as we begin to realize synergies and achieve higher revenue levels.

Speaker #2: We are maintaining our full-year outlook for adjusted gross margins in the low 30s. Moving on to operating expenses, adjusted SG&A, which is net of intangible amortization and deal integration costs, was $66.1 million, versus $33.2 million in the prior year.

Speaker #2: The increase is largely a result of a combination with Blue Halo. As a percentage of revenue, adjusted SG&A in the quarter was 14% of revenue versus 17.6% in FY25.

Speaker #2: Again, these adjusted SG&A levels represent a shift in the business model, and we expect to end the year in the 12% to 13% range as we begin to realize synergies and achieve higher revenue levels.

Wahid Nawabi: Again, these adjusted SG&A levels represent a shift in the business model, and we expect to end the year in the 12% to 13% range as we begin to realize synergies and achieve higher revenue levels. R&D expense for Q2 was $36 million, or 7.6% of revenue, compared to $28.7 million, or 15.2% of revenue in the prior year. Again, this is a shift in the business model, and we expect R&D as a percentage of revenue to end the year between 6% and 7% of revenue, which represents an increase in R&D dollars over the prior year for the combined company. In terms of adjusted EBITDA, slide 14 of our earnings presentation shows the reconciliation of GAAP net income to adjusted EBITDA.

R&D expense for Q2 was $36 million, or 7.6% of revenue, compared to $28.7 million, or 15.2% of revenue in the prior year. Again, this is a shift in the business model, and we expect R&D as a percentage of revenue to end the year between 6% and 7% of revenue, which represents an increase in R&D dollars over the prior year for the combined company. In terms of adjusted EBITDA, slide 14 of our earnings presentation shows the reconciliation of GAAP net income to adjusted EBITDA. Adjusted EBITDA for Q2 was $45 million, up from last year's Q2 of $25.9 million, as reported, primarily due to the incremental BlueHalo results.

Speaker #2: R&D expense for the second quarter was $36 million, or 7.6% of revenue, compared to $28.7 million, or 15.2% of revenue in the prior year.

Speaker #2: Again, this is a shift in the business model, and we expect R&D as a percentage of revenue to end the year between 6% and 7% of revenue, which represents an increase in R&D dollars over the prior year for the combined company.

Speaker #2: In terms of adjusted EBITDA, slide 14 of our earnings presentation shows the reconciliation of GAAP income to adjusted EBITDA. Adjusted EBITDA for Q2 was $45 million, up from last year's Q2 of $25.9 million, as reported, primarily due to the incremental Blue Halo results.

Wahid Nawabi: Adjusted EBITDA for Q2 was $45 million, up from last year's Q2 of $25.9 million, as reported, primarily due to the incremental BlueHalo results. EBITDA as a percentage of revenue was 9.5% in the quarter. Despite some of these one-time costs and impacts from the government shutdown, we continue to forecast the full-year adjusted EBITDA between 15% and 16% of revenue. Now turning to non-GAAP earnings per share, slide 12 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.44 for the second quarter of fiscal 2026 versus $0.47 for diluted share for the second quarter of fiscal 2025, slightly lower due to the same reasons as stated previously. Moving to the balance sheet. At the close of the second quarter, our total cash and investments amounted to $669 million.

EBITDA as a percentage of revenue was 9.5% in the quarter. Despite some of these one-time costs and impacts from the government shutdown, we continue to forecast the full-year adjusted EBITDA between 15% and 16% of revenue. Now turning to non-GAAP earnings per share, slide 12 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.44 for the second quarter of fiscal 2026 versus $0.47 for diluted share for the second quarter of fiscal 2025, slightly lower due to the same reasons as stated previously. Moving to the balance sheet.

Speaker #2: EBITDA as a percentage of revenue was 9.5% in the quarter. Despite some of these one-time costs and impacts from the government shutdown, we continue to forecast the full-year adjusted EBITDA between 15% and 16% of revenue.

Speaker #2: Now turning to non-GAAP earnings per share. Slide 12 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.44 for the second quarter of fiscal 2026 versus $0.47 per diluted share for the second quarter of fiscal 2025.

Speaker #2: Slightly lower due to the same reasons as stated previously. Moving to the balance sheet. At the close of the second quarter, our total cash and investments amounted to $669 million.

At the close of the second quarter, our total cash and investments amounted to $669 million. As reported last quarter, we now have a completely new balance sheet as a result of the BlueHalo transaction and the convertible debt equity financing completed in Q1. Consequently, many of our balances are not comparable to the prior periods. For instance, our overtime revenue recognition has increased from 41% to 75% year-over-year, driving up unbilled receivables. With that said, unbilled receivables continue to be at a higher level than we are targeting.

Speaker #2: As reported last quarter, we now have a completely new balance sheet as a result of the Blue Halo transaction and the convertible debt equity financing completed in Q1.

Wahid Nawabi: As reported last quarter, we now have a completely new balance sheet as a result of the BlueHalo transaction and the convertible debt equity financing completed in Q1. Consequently, many of our balances are not comparable to the prior periods. For instance, our overtime revenue recognition has increased from 41% to 75% year-over-year, driving up unbilled receivables. With that said, unbilled receivables continue to be at a higher level than we are targeting. Turning to backlog, as noted earlier, our funded backlog at the end of the second quarter was $1.1 billion, and unfunded backlog was $2.8 billion. Our visibility to the midpoint of the revenue guidance range is now 93%. I should note that this is consistent with past practice that we include within our visibility revenue from long-term contracts we expect to perform during the fiscal year, but which have not been funded as of this date.

Speaker #2: Consequently, many of our balances are not comparable to prior periods. For instance, our overtime revenue recognition has increased from 41% to 75% year-over-year, driving up unbilled receivables.

Speaker #2: With that said, unbilled receivables continue to be at a higher level than we are targeting. Turning to backlog, as noted earlier, our funded backlog at the end of the second quarter was $1.1 billion, and unfunded backlog was $2.8 billion.

Turning to backlog, as noted earlier, our funded backlog at the end of the second quarter was $1.1 billion, and unfunded backlog was $2.8 billion. Our visibility to the midpoint of the revenue guidance range is now 93%. I should note that this is consistent with past practice that we include within our visibility revenue from long-term contracts we expect to perform during the fiscal year, but which have not been funded as of this date. Finally, I'd like to provide you with our updated FY26 guidance. On slide 8 of the presentation, we provide fiscal 2026 guidance. Fiscal year revenue is expected to be between $1.95 billion and $2 billion.

Speaker #2: Our visibility to the midpoint of the revenue guidance range is now 93%. I should note that this is consistent with past practice that we include within our visibility revenue from long-term contracts we expect to perform during the fiscal year, but which have not been funded as of this date.

Speaker #2: Finally, I’d like to provide you with our updated FY26 guidance. On slide 8 of the presentation, we provide fiscal 2026 guidance. Fiscal year revenue is expected to be between $1.95 billion and $2 billion.

Wahid Nawabi: Finally, I'd like to provide you with our updated FY26 guidance. On slide 8 of the presentation, we provide fiscal 2026 guidance. Fiscal year revenue is expected to be between $1.95 billion and $2 billion. Adjusted EBITDA remains between $300 million and $320 million, and non-GAAP adjusted EPS is now projected to be between $3.40 and $3.55. The midpoint of our revenue guidance range represents nearly a 15% growth over the pro forma FY25 results. The lower non-GAAP EPS range is a result of a higher full-year projected tax rate, largely driven by the Q2 update of the purchase price allocation of the BlueHalo acquisition. With the government shutdown impacting both our fiscal Q2 and Q3, we have seen delays in some of the orders and therefore a shifting of projected revenues to the right. Second-half revenues should be split approximately 45% in Q3 and 55% in Q4.

Adjusted EBITDA remains between $300 million and $320 million, and non-GAAP adjusted EPS is now projected to be between $3.40 and $3.55. The midpoint of our revenue guidance range represents nearly a 15% growth over the pro forma FY25 results. The lower non-GAAP EPS range is a result of a higher full-year projected tax rate, largely driven by the Q2 update of the purchase price allocation of the BlueHalo acquisition. With the government shutdown impacting both our fiscal Q2 and Q3, we have seen delays in some of the orders and therefore a shifting of projected revenues to the right.

Speaker #2: Adjusted EBITDA remains between $300 million and $320 million, and non-GAAP adjusted EPS is now projected to be between $2.00 and $3.40, and $3.55. The midpoint of our revenue guidance range represents nearly a 15% growth over the pro forma FY25 results.

Speaker #2: The lower non-gap EPS range is a result of a higher full year projected tax rate largely driven by the Q2 update of the purchase price allocation of the Blue Halo acquisition.

Speaker #2: With the government shutdown impacting both our fiscal Q2 and Q3, we have seen delays in some of the orders and, therefore, a shift in the projected revenues to the right.

Second-half revenues should be split approximately 45% in Q3 and 55% in Q4. The adjusted EBITDA shift will be more pronounced, with 70% of the second-half EBITDA coming in the fourth quarter. I'd like to close by echoing Wahid's remarks. We are very well aligned with the US Department of War priorities and those of our allies, and we are excited about our prospects. Despite some of the challenges in Q2, we are confident of meeting our guidance for the year. Now, I'd like to turn things back to Wahid.

Speaker #2: Second-half revenue should be split approximately 45% in Q3 and 55% in Q4. The adjusted EBITDA shift will be more pronounced, with 70% of the second-half EBITDA coming in the fourth quarter.

Wahid Nawabi: The adjusted EBITDA shift will be more pronounced, with 70% of the second-half EBITDA coming in the fourth quarter. I'd like to close by echoing Wahid's remarks. We are very well aligned with the US Department of War priorities and those of our allies, and we are excited about our prospects. Despite some of the challenges in Q2, we are confident of meeting our guidance for the year. Now, I'd like to turn things back to Wahid. Thanks, Kevin. Before turning the call over for questions, I'd like to reiterate some of the positive momentum entering the third quarter of fiscal year 2026. First, record second quarter awards with a total contract value of $3.5 billion bolstered bookings to reach an all-time high of nearly $1.4 billion, driven by key program wins that support AV's long-term growth. Second, we also achieved another record second quarter revenue of nearly $473 million.

Speaker #2: I'd like to close by echoing Raheed's remarks: we are very well aligned with the U.S. Department of War priorities and those of our allies, and we are excited about our prospects.

Speaker #2: Despite some of the challenges in Q2, we are confident of meeting our guidance for the year. Now, I'd like to turn things back to Raheed.

Wahid Nawabi: Thanks, Kevin. Before turning the call over for questions, I'd like to reiterate some of the positive momentum entering the third quarter of fiscal year 2026. First, record second quarter awards with a total contract value of $3.5 billion bolstered bookings to reach an all-time high of nearly $1.4 billion, driven by key program wins that support AV's long-term growth. Second, we also achieved another record second quarter revenue of nearly $473 million. Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand.

Speaker #2: Thanks, Kevin. Before turning the call over for questions, I'd like to reiterate some of the positive momentum entering the third quarter of fiscal year 2026.

Speaker #2: First, record second quarter awards with a total contract value of $3.5 billion bolstered bookings, to reach an all-time high of nearly $1.4 billion driven by key program wins that support AV's long-term growth.

Speaker #2: Second, we also achieved another record second quarter revenue of nearly $473 million. Third, we launched several new innovative products, aligned to our customers' highest priorities, and continue to execute on expanding our manufacturing capacity to meet accelerated demand.

Wahid Nawabi: Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. Fourth, with 93% visibility to the midpoint of our guidance range, we are raising the lower end of our fiscal year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Our strong second quarter results reinforce our confidence in AV's future and our role in shaping the next era of defense. With integrated capabilities across multiple domains of modern warfare, advanced technologies, and the ability to scale rapidly, we believe we are well positioned to meet the Department of the War's highest priorities and sustain significant growth in a demand-driven market. The Department of the War has reiterated sharpened focus on speed, scale, and commercially driven procurement strategies, all of which plays directly to AV's strengths.

Fourth, with 93% visibility to the midpoint of our guidance range, we are raising the lower end of our fiscal year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Our strong second quarter results reinforce our confidence in AV's future and our role in shaping the next era of defense. With integrated capabilities across multiple domains of modern warfare, advanced technologies, and the ability to scale rapidly, we believe we are well positioned to meet the Department of the War's highest priorities and sustain significant growth in a demand-driven market.

Speaker #2: And fourth, with 93% visibility to the midpoint of our guidance range, we are raising the lower end of our fiscal year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion.

Speaker #2: Our strong second quarter results reinforce our confidence in AV's future and our role in shaping the next era of defense. With integrated capabilities across multiple domains of modern warfare, advanced technologies, and the ability to scale rapidly, we believe we are well positioned to meet the Department of Defense's highest priorities and sustain significant growth in the demand-driven market.

The Department of the War has reiterated sharpened focus on speed, scale, and commercially driven procurement strategies, all of which plays directly to AV's strengths. This has been our strategy from the very beginning, investing in innovative solutions ahead of demand, scaling rapidly, and driving innovation to deliver decisive advantages for our customers. Our alignment with these priorities, combined with our successful track record and best-in-class production capacity, creates a powerful competitive advantage and positions AV as a trusted partner ready to deliver at the pace the mission demands.

Speaker #2: The Department of War has reiterated its sharpened focus on speed, scale, and commercially driven procurement strategies, all of which play directly to AV's strengths. This has been our strategy from the very beginning.

Wahid Nawabi: This has been our strategy from the very beginning, investing in innovative solutions ahead of demand, scaling rapidly, and driving innovation to deliver decisive advantages for our customers. Our alignment with these priorities, combined with our successful track record and best-in-class production capacity, creates a powerful competitive advantage and positions AV as a trusted partner ready to deliver at the pace the mission demands. I want to thank our employees, shareholders, and customers for their continued commitment to AV and our mission. We're honored to support the most critical defense missions at this pivotal moment, and we're ready to seize the tremendous opportunities ahead. And with that, Kevin, Denise, and I will now take your questions. Thank you so much. And as a reminder to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster.

Speaker #2: Investing in innovative solutions ahead of demand, scaling rapidly, and driving innovation to deliver decisive advantages for our customers. Our alignment with these priorities, combined with our successful track record and best-in-class production capacity, creates a powerful competitive advantage and positions AV as a trusted partner ready to deliver at the pace the mission demands.

I want to thank our employees, shareholders, and customers for their continued commitment to AV and our mission. We're honored to support the most critical defense missions at this pivotal moment, and we're ready to seize the tremendous opportunities ahead. And with that, Kevin, Denise, and I will now take your questions.

Speaker #2: I want to thank our employees, shareholders, and customers for their continued commitment to AV and our mission. We're honored to support the most critical defense missions at this pivotal moment, and we're ready to seize the tremendous opportunities ahead.

Speaker #2: And with that, Kevin, Denise, and I will now take your questions.

Speaker #2: Thank you so much, and as a

Operator: Thank you so much. And as a reminder to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. We respectfully ask that callers limit themselves to one question and return to the queue to ask additional questions. Our first question comes from Greg Conrad with Jefferies. Please proceed.

Speaker #3: reminder to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. We respectfully ask that callers limit themselves to one question and return to the queue to ask additional questions.

Wahid Nawabi: We respectfully ask that callers limit themselves to one question and return to the queue to ask additional questions. Our first question comes from Greg Conrad with Jefferies. Please proceed. Good afternoon. Hey, Greg. Hi, Greg. Maybe just one on programs. I think you announced that you got two more Badger units in the quarter. Can you just remind us how you're thinking about the current schedule of SCAR and maybe how that contributes to the expected ramp for that program? Sure. So Greg, as I mentioned in my remarks, we did secure an additional task order and award from the US Space Force for additional Badgers, two more additional Badgers. The whole SCAR program, as we mentioned in our comments before, has been so far in a customer-funded development process.

Speaker #3: Our first question comes from Greg Conrad with Jefferies. Please proceed.

Greg Konrad: Good afternoon.

Kevin McDonnell: Hey, Greg.

Speaker #5: Hey, Good afternoon. Greg.

Wahid Nawabi: Hi, Greg.

Speaker #4: Hi, Greg.

Greg Konrad: Maybe just one on programs. I think you announced that you got two more Badger units in the quarter. Can you just remind us how you're thinking about the current schedule of SCAR and maybe how that contributes to the expected ramp for that program?

Speaker #5: Maybe just one on programs. I think you announced that you got two more Badger units in the quarter. Can you just remind us how you're thinking about the current schedule?

Speaker #5: SCAR and maybe how that contributes to the expected ramp for that.

Speaker #5: program?

Wahid Nawabi: Sure. So Greg, as I mentioned in my remarks, we did secure an additional task order and award from the US Space Force for additional Badgers, two more additional Badgers. The whole SCAR program, as we mentioned in our comments before, has been so far in a customer-funded development process. We're shifting now from development activity to delivering products, most of which is going to end up eventually going into a firm fixed-price contract. That transition not only ramps up the revenue for the second half of the year, but also improves the margin profile of that business.

Speaker #4: Sure. So,

Speaker #4: Greg, as I mentioned in my remarks, we did secure an additional task order and award from the U.S. Space Force for two more additional Badgers.

Speaker #4: The whole SCAR program, as we mentioned in our comments before, has been so far in a customer-funded development process. We're shifting now from development activity to delivering products.

Wahid Nawabi: We're shifting now from development activity to delivering products, most of which is going to end up eventually going into a firm fixed-price contract. That transition not only ramps up the revenue for the second half of the year, but also improves the margin profile of that business. So we're very much on track with our plans. We're pleased with the performance so far, and we expect the margins as well as the revenue of that business to actually improve in Q3 and Q4 of this year and continue to improve beyond this fiscal year. And then maybe just one follow-up to that. I mean, I think you talked about a couple of the headwinds that you saw in the quarter around profitability, including Oracle and the shutdown.

Speaker #4: Most of which is going to end up eventually going into our firm-fixed-price contracts. That transition not only ramps up the revenue for the second half of the year, but also improves the margin profile of that business.

So we're very much on track with our plans. We're pleased with the performance so far, and we expect the margins as well as the revenue of that business to actually improve in Q3 and Q4 of this year and continue to improve beyond this fiscal year.

Speaker #4: So, we're very much on track with our plans. We're pleased with the performance so far, and we expect the margins, as well as the revenue of that business, to actually improve in the third and fourth quarters of this year, and continue to improve beyond this fiscal.

Speaker #4: year. And then maybe

Greg Konrad: And then maybe just one follow-up to that. I mean, I think you talked about a couple of the headwinds that you saw in the quarter around profitability, including Oracle and the shutdown. If you kind of think about that ramp of profitability and margin given the 70% in Q4, how are you thinking about that progression? How much is operating leverage versus maybe mix and just the biggest drivers as you see as you head into the second half?

Speaker #5: Just one follow-up to that. I mean, I think you talked about a couple of the headwinds that you saw in the quarter around profitability, including Oracle and the shutdown.

Speaker #5: If you kind of think about that ramp of profitability and margin given the 70% in Q4, how are you thinking about that progression? How much is operating leverage versus maybe mix, and just the biggest drivers as you see as you head into the second?

Wahid Nawabi: If you kind of think about that ramp of profitability and margin given the 70% in Q4, how are you thinking about that progression? How much is operating leverage versus maybe mix and just the biggest drivers as you see as you head into the second half? Well, I think mix is going to be a big part of that, as Wahid just mentioned about the Badger program and going into fixed-price product revenues, some of our other programs, LOCUST, and things like this being product revenues, and a ramp-up in delivering across the other business units, increasing the proportion of product revenues versus service revenues. We don't see the service revenues growing significantly in the second half, whereas the product revenues are going to drive most of that growth.

Speaker #5: half? Well, I think

Kevin McDonnell: Well, I think mix is going to be a big part of that, as Wahid just mentioned about the Badger program and going into fixed-price product revenues, some of our other programs, LOCUST, and things like this being product revenues, and a ramp-up in delivering across the other business units, increasing the proportion of product revenues versus service revenues. We don't see the service revenues growing significantly in the second half, whereas the product revenues are going to drive most of that growth. So that's going to give us better mix, and that's why we're going to be able to achieve the high 30s adjusted gross margins by Q4.

Speaker #4: Mix is going to be a big part of that, as Raheed just mentioned about the Badger program and going into fixed-price product revenues. Some of our other programs, like Locus and things like this, are also contributing to product revenues.

Speaker #4: And a ramp-up in delivering across the other business units, increasing the proportion of product revenues versus service revenues. We don't see the service revenues growing significantly in the second half.

Speaker #4: Whereas the product revenues are going to drive most of that growth. So that's going to give us a better mix, and that's why we're going to be able to achieve high 30s adjusted gross margins by Q4.

Wahid Nawabi: So that's going to give us better mix, and that's why we're going to be able to achieve the high 30s adjusted gross margins by Q4. Greg, let's also keep in mind that we have secured nearly $3.5 billion worth of almost all-source IDIQ contracts that allows us now to receive task orders underneath those contracts. Once the funding from the big beautiful bill and the budgets for the Department of War comes through as a result of the shutdown that has been delayed, those product revenues are going to, and task orders are going to be received in the next one or two months. That's what we expect, and we want to convert those to revenue.

Speaker #4: And Greg, let's also keep in mind that we have secured nearly $3.5 billion worth of almost all sole-source IDIQ contracts. That allows us now to receive task orders underneath those contracts once the funding from the big, beautiful bill and the budgets for the Department of War come through as a result of the shutdown that has been delayed.

Wahid Nawabi: Greg, let's also keep in mind that we have secured nearly $3.5 billion worth of almost all-source IDIQ contracts that allows us now to receive task orders underneath those contracts. Once the funding from the big beautiful bill and the budgets for the Department of War comes through as a result of the shutdown that has been delayed, those product revenues are going to, and task orders are going to be received in the next one or two months. That's what we expect, and we want to convert those to revenue. So the volume goes up, the mix improves, and also the profile of the profitability of some of these products and businesses are going to improve, and that's precisely what we expected at the beginning of the fiscal year.

Speaker #4: Those product revenues and task orders are going to be received in the next one or two months. That's what we expect, and we're going to convert those to revenue.

Speaker #4: So the volume goes up, the mix improves, and also the profile of the profitability of some of these products and businesses is going to improve, and that's precisely what we expected at the beginning of the fiscal year.

Wahid Nawabi: So the volume goes up, the mix improves, and also the profile of the profitability of some of these products and businesses are going to improve, and that's precisely what we expected at the beginning of the fiscal year. Appreciate it. Thanks. Thanks, Greg. You're welcome. Thank you. Our next question is from Ronald Epstein with Bank of America. Please proceed. Hi, this is Amanda Steirer on for Ron today. Okay. Hi there. Hi. I was wondering if you could. In the past, you've given a breakout of by product in the portfolio. I was wondering if you had any color there or if you could talk a little bit about the relative growth levels by product. Well, I mean, we try to give as much granularity. We've improved our granularity this quarter by giving you further breakout of the different major product groupings for each segment.

Greg Konrad: Appreciate it. Thanks.

Speaker #5: Appreciate it. Thanks.

Kevin McDonnell: Thanks, Greg.

Speaker #4: You're

Speaker #4: welcome. Thank you.

Wahid Nawabi: You're welcome.

Operator: Thank you. Our next question is from Ronald Epstein with Bank of America. Please proceed.

Speaker #3: Our next question is from Ronald Epstein with Bank of America. Please

Speaker #3: Hi, this is Tyra Wan for Ron.

Amanda Soh: Hi, this is Amanda Steirer on for Ron today.

Speaker #6: today.

Kevin McDonnell: Okay.

Wahid Nawabi: Hi there.

Speaker #6: Hi.

Speaker #6: Hi there. I was wondering if you could, in the past, you've given a breakout by product in the portfolio. I was wondering if you had any color there or if you could talk a little bit about the relative growth levels.

Amanda Soh: Hi. I was wondering if you could. In the past, you've given a breakout of by product in the portfolio. I was wondering if you had any color there or if you could talk a little bit about the relative growth levels by product.

Speaker #6: Well, I mean, we try to give.

Kevin McDonnell: Well, I mean, we try to give as much granularity. We've improved our granularity this quarter by giving you further breakout of the different major product groupings for each segment. So I tried to give some color behind that that shows what products are driving the different growth in those different product categories. So they're kind of combinations of products, obviously, but we're trying to provide more color for you. Was there something specific you were wondering about?

Speaker #4: As much granular, we've improved our granularity this quarter by giving you further breakout of the different major product groupings for each segment. And so, I try to give some color behind that that shows what products are driving the different growth in those different product categories.

Wahid Nawabi: So I tried to give some color behind that that shows what products are driving the different growth in those different product categories. So they're kind of combinations of products, obviously, but we're trying to provide more color for you. Was there something specific you were wondering about? Just if you could talk about Switchblade growth. I think you mentioned Ukraine. If there's any color, you could provide there. Yeah. I mean, year over year, Switchblade by far is the fastest growing product in the CEOS precision strike category. Overall, we saw significant growth, multiple x for the Jump 20 in Q2 versus the prior year. Great. Thank you. Yep. You're welcome. Thank you. Our next question comes from Anthony Valentini with Goldman Sachs. Please proceed. Hey, guys. Thanks for the question.

Speaker #4: So they're kind of combinations of products, obviously, but we're trying to provide more color for you. Was there something specific you were wondering?

Speaker #4: about? Just if you could

Amanda Soh: Just if you could talk about Switchblade growth. I think you mentioned Ukraine. If there's any color, you could provide there.

Speaker #6: Talk about switchblade growth. I think you mentioned Ukraine. If there's any color you could provide.

Speaker #6: there. Yeah.

Kevin McDonnell: Yeah. I mean, year over year, Switchblade by far is the fastest growing product in the CEOS precision strike category. Overall, we saw significant growth, multiple x for the Jump 20 in Q2 versus the prior year.

Speaker #4: I mean, year over year, Switchblade by far is the fastest-growing product in the CEOS precision strike category. Overall, we saw significant growth—multiple X—for the Jump 20 in Q2 versus the prior year.

Speaker #4: year. Great.

Amanda Soh: Great. Thank you.

Speaker #6: Thank

Wahid Nawabi: Yep.

Kevin McDonnell: You're welcome.

Speaker #5: Yep.

Speaker #4: You're welcome. you.

Operator: Thank you. Our next question comes from Anthony Valentini with Goldman Sachs. Please proceed.

Speaker #3: Thank you. Our next question comes from Anthony Valentini with Goldman Sachs. Please proceed.

Anthony Valentini: Hey, guys. Thanks for the question. It seems pretty obvious that you guys have massive growth opportunities here across the five to 10 different products that you guys have been highlighting. But maybe to put a finer point on it, is there a way to think through the catalyst path over the next few months as some of the reconciliation funding starts to hit backlogs? What should people be looking for?

Speaker #7: Hey, guys. Thanks for the question. It seems pretty obvious that you all have massive growth opportunities here across the 5 to 10 different products that you have been highlighting.

Wahid Nawabi: It seems pretty obvious that you guys have massive growth opportunities here across the five to 10 different products that you guys have been highlighting. But maybe to put a finer point on it, is there a way to think through the catalyst path over the next few months as some of the reconciliation funding starts to hit backlogs? What should people be looking for? Anthony, yes, of course. We'd be glad to provide some more color there. We certainly have a significant amount of opportunity for growth and value creation here in the next, not only just a couple of quarters, but next few years. We're positioned really, really well. If you look at the key catalysts for growth, loitering munition, of course, we continue to grow that category of the switchblade and one-way attack drones that are in that bucket.

Speaker #7: But maybe to put a finer point on it, is there a way to think through the catalyst path over the next few months as some of the reconciliation funding starts to hit backlogs?

Speaker #7: What should people be looking

Speaker #7: for? Anthony, yes, of course.

Wahid Nawabi: Anthony, yes, of course. We'd be glad to provide some more color there. We certainly have a significant amount of opportunity for growth and value creation here in the next, not only just a couple of quarters, but next few years. We're positioned really, really well. If you look at the key catalysts for growth, loitering munition, of course, we continue to grow that category of the switchblade and one-way attack drones that are in that bucket. Our RF counter UAS solutions, the Titan family of products, is another contributor of significant growth year over year.

Speaker #4: Be glad to provide some more color there. We certainly have a significant amount of opportunity for growth in value creation here in the next not only just a couple of quarters, but the next few years.

Speaker #4: We're positioned really, really well. If you look at the key catalysts for growth—loading munition, of course—we continue to grow that category of the Switchblade and one-way attack drones that are in that bucket.

Speaker #4: Our RF counter UAS solutions, the Titan family of products, is another contributor to significant growth year over year. Our medium UAS product line, which includes Jump 20 and Jump 20X, is another category of strong growth and a contributor to our growth in general.

Wahid Nawabi: Our RF counter UAS solutions, the Titan family of products, is another contributor of significant growth year over year. Our medium UAS product line, which is Jump 20 and Jump 20X, is another category of strong growth and contributor to our growth in general, as well as profitability. Our P550, we expect significant orders for that in Q3 and Q4 of this year. The US Army is intending to purchase a lot. There's a lot of dollars in the budget for that, and we expect to have a fairly large share of that spend with the US Army. We're also lining up a bunch of international customers for that product line. The SCAR and Badger program and product is also transitioning to production, and we're going to deliver more real numbers, and we're going to ramp up revenue.

Our medium UAS product line, which is Jump 20 and Jump 20X, is another category of strong growth and contributor to our growth in general, as well as profitability. Our P550, we expect significant orders for that in Q3 and Q4 of this year. The US Army is intending to purchase a lot. There's a lot of dollars in the budget for that, and we expect to have a fairly large share of that spend with the US Army. We're also lining up a bunch of international customers for that product line. The SCAR and Badger program and product is also transitioning to production, and we're going to deliver more real numbers, and we're going to ramp up revenue.

Speaker #4: As well as profitability, our P550, we expect significant orders for that. In the third and fourth quarters of this year, the U.S. Army is intending to purchase a lot.

Speaker #4: There's a lot of dollars in the budget for that, and we expect to have a fairly large share of that spend with the U.S. Army.

Speaker #4: And we're also lining up a bunch of international customers for that product line. The SCAR and Badger program and product are also transitioning to production, and we're going to deliver more serial numbers. We will ramp up revenue as the profile of that revenue is higher margin, as well as the volume being higher.

The profile of that revenue is higher margin, as well as the volume is higher. That helps. So in a nutshell, if you look at across our portfolio, we've got growth across almost every one of our key product lines. Some of them are contributing to some smaller extent versus larger ones, but they're all growing quite rapidly. One area that may not grow as much is our cybersecurity business, and that's primarily because it's a customer-funded engineering services and software solution business that really doesn't ramp up aggressively in terms of growth. But overall, we're very pleased with the performance.

Wahid Nawabi: The profile of that revenue is higher margin, as well as the volume is higher. That helps. So in a nutshell, if you look at across our portfolio, we've got growth across almost every one of our key product lines. Some of them are contributing to some smaller extent versus larger ones, but they're all growing quite rapidly. One area that may not grow as much is our cybersecurity business, and that's primarily because it's a customer-funded engineering services and software solution business that really doesn't ramp up aggressively in terms of growth. But overall, we're very pleased with the performance. We're looking for multiple quarters and years of growth. We're positioned really well with the shift in the US DoD and the administration strategies. The kind of business model, products, and go-to-market strategy that we have is precisely what the US

Speaker #4: That helps. So, in a nutshell, if you look across our portfolio, we've got growth across almost every one of our key product lines.

Speaker #4: Some of them are contributing to some smaller extent versus larger ones, but they're all growing quite rapidly. One area that may not grow as much is our cybersecurity business, and that's primarily because it's a customer-funded engineering services and software solution business that really doesn't ramp up aggressively in terms of growth.

Speaker #4: But overall, we're very pleased with the performance. We're looking for multiple quarters and years of growth. We're positioned really well with the shift in the USDOD and the administration strategies.

We're looking for multiple quarters and years of growth. We're positioned really well with the shift in the US DoD and the administration strategies. The kind of business model, products, and go-to-market strategy that we have is precisely what the U.S. Department of War is looking for, and we're positioned incredibly well. There's going to be a lot of money spent. It is really hard to predict exactly how much. There's a lot of demand coming our way, and we're getting ready for it as we speak.

Speaker #4: The kind of business model and products and go-to-market strategy that we have is precisely what the U.S. Department of War is looking for, and we're positioned incredibly well.

Wahid Nawabi: Department of War is looking for, and we're positioned incredibly well. There's going to be a lot of money spent. It is really hard to predict exactly how much. There's a lot of demand coming our way, and we're getting ready for it as we speak. Yeah. I mean, I think we think we're on the precipice of some significant growth across all those categories, but as with anything in defense, it's difficult to predict the exact timing of that. But we definitely think we're very close to some breakthroughs on some of these products Wahid mentioned. Okay. Great. That's helpful. I appreciate all that color. One other quick one. I guess I'm just curious, how do we square that with if I'm looking at the backlog in Q1 versus Q2, it's slightly down. So can you guys help me understand why that's the case?

Speaker #4: There's going to be a lot of money spent. It is really hard to predict exactly how much. There's a lot of demand coming our way, and we're getting ready for it.

Speaker #4: it. As we speak. Yeah.

Speaker #5: I mean, I think we believe we're on the precipice of some significant growth across all those categories. But as with anything in defense, it's difficult to predict the exact timing of that.

Kevin McDonnell: Yeah. I mean, I think we think we're on the precipice of some significant growth across all those categories, but as with anything in defense, it's difficult to predict the exact timing of that. But we definitely think we're very close to some breakthroughs on some of these products Wahid mentioned.

Speaker #5: But we definitely think we're very close to some breakthroughs on some of these products Wahid mentioned.

Anthony Valentini: Okay. Great. That's helpful. I appreciate all that color. One other quick one. I guess I'm just curious, how do we square that with if I'm looking at the backlog in Q1 versus Q2, it's slightly down. So can you guys help me understand why that's the case? Should we see the backlogs significantly ramping into the back half of the year, or is it just so unpredictable? It's more that you guys have a feel over the next 12 to 18 months versus the next six.

Speaker #7: Okay. Great. That's helpful. I appreciate all that color. One other quick one. I guess I'm just curious, how do we square that with if I'm looking at the backlog in one Q versus two Q, it's slightly down.

Speaker #7: So I just, can you guys help me understand why that's the case? And should we see the backlogs significantly ramping into the back half of the year, or is it just so unpredictable?

Wahid Nawabi: Should we see the backlogs significantly ramping into the back half of the year, or is it just so unpredictable? It's more that you guys have a feel over the next 12 to 18 months versus the next six. Well, I think it's pretty flat from Q1 in terms of the funded backlog. The unfunded backlog grew significantly, but remember, we were in the CR and the shutdown. So while we got many of these contracts through, which was great, a lot of them didn't come with significant funding, and we expect that to be coming as they get back and are funding back to business on funding new contracts within the Department of War. So it's a little bit of an issue with the shutdown happening and delaying some of the actual funding on these contracts. Okay.

Speaker #7: It's more that you guys have a feel over the next 12 to 18 months versus the next 6.

Kevin McDonnell: Well, I think it's pretty flat from Q1 in terms of the funded backlog. The unfunded backlog grew significantly, but remember, we were in the CR and the shutdown. So while we got many of these contracts through, which was great, a lot of them didn't come with significant funding, and we expect that to be coming as they get back and are funding back to business on funding new contracts within the Department of War. So it's a little bit of an issue with the shutdown happening and delaying some of the actual funding on these contracts.

Speaker #4: Well, I think it's pretty flat from Q1 in terms of the funded backlog. The unfunded backlog grew significantly, but remember, we were in the CR and the shutdown.

Speaker #4: So, while we got many of these contracts through, which was great, a lot of them didn't come with significant funding. We expect that to be coming as they get back and our funding returns to business on funding new contracts within the Department of War.

Speaker #4: So, it's a little bit of an issue with the shutdown happening and delaying some of the actual funding on these contracts.

Anthony Valentini: Okay. Kevin, do you have a number for what you guys expect Switchblade to be in 2026? I know that you guys gave the color on what the production capacity will be out of the Utah facility in the future, but is there a way for us to think about the 2026 forecast?

Speaker #7: Okay. And Kevin, do you have a number for what you guys expect Switchblade to be in 2026? I know that you guys gave the color on what the production capacity will be out of the Utah facility in the future, but is there a way for us to think about the 2026?

Wahid Nawabi: Kevin, do you have a number for what you guys expect Switchblade to be in 2026? I know that you guys gave the color on what the production capacity will be out of the Utah facility in the future, but is there a way for us to think about the 2026 forecast? I don't think we're not really giving specific guidance on the different products, but I think we talked about before roughly $500 million of capacity before we increase to the new facility. So you can go ± that probably. Okay. Great. Thank you guys so much for the questions. Thank you, Anthony. Thank you. Our next question comes from Louis DiPalma with William Blair. Please proceed. Excellent. Wahid, Kevin, and Denise, good afternoon. Good afternoon, Louis. Good afternoon. Wahid, what was the tone from the Reagan Defense Forum over the weekend?

Speaker #7: Forecast? I don't think we're really...

Kevin McDonnell: I don't think we're not really giving specific guidance on the different products, but I think we talked about before roughly $500 million of capacity before we increase to the new facility. So you can go ± that probably.

Speaker #4: Giving specific guidance on the different products, I think we talked about before roughly $500 million of capacity before we increased to the new facility.

Speaker #4: So you can go plus or minus that probably.

Anthony Valentini: Okay. Great. Thank you guys so much for the questions.

Speaker #7: Okay. Great. Thank you guys so much for the questions.

Wahid Nawabi: Thank you, Anthony.

Speaker #4: Thank you,

Speaker #4: Anthony. Thank you.

Operator: Thank you. Our next question comes from Louie DiPalma with William Blair. Please proceed.

Speaker #3: Our next question comes from Louis D. Palma with William Blair. Please.

Speaker #3: proceed. Excellent.

Louie DiPalma: Excellent. Wahid, Kevin, and Denise, good afternoon.

Speaker #8: afternoon.

Kevin McDonnell: Good afternoon, Louie.

Speaker #4: Good afternoon.

Wahid Nawabi: Good afternoon.

Louie DiPalma: Wahid, what was the tone from the Reagan Defense Forum over the weekend? Are you increasingly confident given all of the presentations of AeroVironment's positioning across your different product lines, whether it's your drones, your attack drones, the electronic warfare in space?

Speaker #8: Wahid, what was the tone from the Reagan Defense Forum over the weekend? And are you increasingly confident, given all the presentations of AeroVironment's positioning across your different product lines—whether it's your drones, your attack drones, the electronic warfare, and space?

Wahid Nawabi: Are you increasingly confident given all of the presentations of AeroVironment's positioning across your different product lines, whether it's your drones, your attack drones, the electronic warfare in space? Thanks. Louis, I personally attended the Reagan National Defense Forum this past weekend. The overall sentiment is that we are the role model company that the US Department of War and the current administration wants to see a lot more of. We're setting the pace for everyone else. The procurement strategies are shifting to companies that develop things on their own dime. They're doing it ahead of product program requirements. They're doing it at agile and warp speeds. We're transitioning into production quickly. We're focused on all the right areas where the US Department of War needs and has major capability gaps. These are critical areas of capability gap, and it's required for the future defense of the US.

Speaker #8: Thanks.

Wahid Nawabi: Thanks. Louie, I personally attended the Reagan National Defense Forum this past weekend. The overall sentiment is that we are the role model company that the US Department of War and the current administration wants to see a lot more of. We're setting the pace for everyone else. The procurement strategies are shifting to companies that develop things on their own dime. They're doing it ahead of product program requirements. They're doing it at agile and warp speeds. We're transitioning into production quickly. We're focused on all the right areas where the US Department of War needs and has major capability gaps.

Speaker #4: Louis, I

Speaker #4: Personally attended the Reagan National Defense Forum this past weekend. The overall sentiment is that we are the role model company that the U.S. Department of War and the current administration want to see a lot more of.

Speaker #4: We're setting the pace for everyone else. The procurement strategies are shifting. Companies that develop things on their own dime are doing it ahead of product program requirements.

Speaker #4: They're doing it at agile and warp speeds. Then we're transitioning it to production quickly. They're focused. We're focused on all the right areas with the U.S. Department of War needs and have major capability gaps.

These are critical areas of capability gap, and it's required for the future defense of the US. And our allies. We believe we're positioned incredibly well, and I think we're going to see continued demand to come our way because of the fact that we can also produce at scale today. We're one of the very, very few companies in these categories that actually has the capacity today and continue to expand it even further to deliver reliable, battle-proven products to our customers at scale. That is a huge competitive advantage that we have compared to everyone else in the market. We're setting the pace for everybody. So I think the sentiment is very positive and strong for AV.

Speaker #4: These are critical areas of capability gap, and they're required for the future defense of the U.S. and our allies. We believe we're positioned incredibly well.

Wahid Nawabi: And our allies. We believe we're positioned incredibly well, and I think we're going to see continued demand to come our way because of the fact that we can also produce at scale today. We're one of the very, very few companies in these categories that actually has the capacity today and continue to expand it even further to deliver reliable, battle-proven products to our customers at scale. That is a huge competitive advantage that we have compared to everyone else in the market. We're setting the pace for everybody. So I think the sentiment is very positive and strong for AV. On this call, you've discussed many of your product lines, such as the P550, your Badger with the SCAR program, and your Jump 20s.

Speaker #4: And I think we're going to see continued demand to come our way because of the fact that we can also produce at scale today.

Speaker #4: We're one of the very, very few companies in these categories that actually has the capacity today and continues to expand it even further to deliver reliable, battle-proven products to our customers at scale.

Speaker #4: That is a huge competitive advantage that we have compared to everyone else in the market, and we're setting the pace for everybody. So, I think the sentiment is very positive and strong for AV.

Louie DiPalma: On this call, you've discussed many of your product lines, such as the P550, your Badger with the SCAR program, and your Jump 20s. I was wondering, did your long-haul laser communications program from the undisclosed customer—was that contract recently upsized from $240 million to $385 million? It shows a larger number in your slide presentation. I was also wondering, have you started delivering terminals as part of that program?

Speaker #8: Excellent. And on this call, you've discussed many of your product lines, such as the P550, your program, and your Jump 20s. I was wondering about your long-haul laser communications program from the undisclosed customer.

Wahid Nawabi: I was wondering, did your long-haul laser communications program from the undisclosed customer—was that contract recently upsized from $240 million to $385 million? It shows a larger number in your slide presentation. I was also wondering, have you started delivering terminals as part of that program? So Louis, I can only speak to that program at a very high level due to the sensitivity of that program and customer. We are incredibly delighted and pleased with the success that we're having in long-haul laser communication terminal. Essentially, we all know from the conflicts of Ukraine that RF communication is very susceptible to jamming. Every satellite that the US has in space, essentially, is susceptible to that jamming problem. If we cannot control and talk to our satellites, especially in the geosynchronous satellites, we've got a major problem. Those assets are not useful.

Speaker #8: Was that contract recently upsized from $240 million to $385 million? It shows a larger number in your slide presentation. And I was also wondering, have you started delivering terminals as part of that program?

Speaker #4: So, so Louis, I can only speak to that program at a very high level due to the sensitivity of that program and customer. We are incredibly delighted and pleased with the success that we're having in long-haul laser communication terminals.

Wahid Nawabi: So Louie, I can only speak to that program at a very high level due to the sensitivity of that program and customer. We are incredibly delighted and pleased with the success that we're having in long-haul laser communication terminal. Essentially, we all know from the conflicts of Ukraine that RF communication is very susceptible to jamming. Every satellite that the US has in space, essentially, is susceptible to that jamming problem. If we cannot control and talk to our satellites, especially in the geosynchronous satellites, we've got a major problem. Those assets are not useful.

Speaker #4: Essentially, we all know from the conflicts in Ukraine that RF communication is very susceptible to jamming. Every satellite that the U.S. has in space is essentially susceptible to that jamming problem.

Speaker #4: If we cannot control and talk to our satellites, especially in the geosynchronous orbit, we've got a major problem. Those assets are not useful. We are one of the only companies that we know of that has been awarded a contract of this magnitude, up to $240 million, to actually provide the laser communication terminals to overhaul and upgrade the U.S. geosynchronous satellite constellation for national security.

And we are one of the only companies that we know of that has been awarded a contract of this magnitude, up to $240 million, to actually provide the laser communication terminals to overhaul and upgrade the US geosynchronous satellite constellation for national security. That is a massive, massive step forward for a company in our nation. We beat many of the major prime contractors in that competition. So there is certainly a lot more upside on that contract because we're just beginning to deliver systems. We haven't delivered much yet. We continue to work with the customer. Our system's performing really well, and it takes a while for that to happen. That's part of the program. So we're very excited, and there are options for them to increase that significantly.

Wahid Nawabi: And we are one of the only companies that we know of that has been awarded a contract of this magnitude, up to $240 million, to actually provide the laser communication terminals to overhaul and upgrade the US geosynchronous satellite constellation for national security. That is a massive, massive step forward for a company in our nation. We beat many of the major prime contractors in that competition. So there is certainly a lot more upside on that contract because we're just beginning to deliver systems. We haven't delivered much yet. We continue to work with the customer. Our system's performing really well, and it takes a while for that to happen. That's part of the program. So we're very excited, and there are options for them to increase that significantly. Yeah. The 381 includes the options.

Speaker #4: That is a massive, massive step forward for a company in our nation. And we beat many of the major prime contractors in that competition.

Speaker #4: And so, there is certainly a lot more upside on that contract because we're just beginning to deliver systems. We haven't delivered much yet. We continue to work with the customer.

Speaker #4: Our systems are performing really well, and it takes a while for that to happen. That's part of the program, so we're very excited. There are options for them to increase that.

Speaker #4: significantly. Yeah,

Kevin McDonnell: Yeah. The 381 includes the options. We put forth our new definitions here to make sure we're all on the same page. That 240 was the original committed contract, and the 380 was taking the options.

Speaker #5: The $381 million includes the options. As we put forth our new definitions here, to make sure we're all on the same page, that $240 million was the original committed contract, and the $380 million was taking the options.

Wahid Nawabi: We put forth our new definitions here to make sure we're all on the same page. That 240 was the original committed contract, and the 380 was taking the options. Great. And so as part of the original committed contract, does that mean that is it funded already? No. So Louis, the vast majority of that contract is not funded yet. As Kevin said earlier, one of the reasons why our funded backlog is nearly the same as last quarter and it did not grow as much is because there's two things that have happened. One, the government shutdown put employees of the government not coming to the office and being able to actually put contracts and award things, one.

Louie DiPalma: Great. And so as part of the original committed contract, does that mean that is it funded already?

Speaker #8: Great. And so, as part of the original committed contract, does that mean that it is funded already?

Wahid Nawabi: No. So Louie, the vast majority of that contract is not funded yet. As Kevin said earlier, one of the reasons why our funded backlog is nearly the same as last quarter and it did not grow as much is because there's two things that have happened. One, the government shutdown put employees of the government not coming to the office and being able to actually put contracts and award things, one. But the bigger problem was that because of the continuing resolution and the budget that just passed with a big, beautiful bill, those dollars have not made it into the accounts of our customers to be able to then award task orders against those IDIQs.

Speaker #4: No. So, Louis, the vast majority of that contract is not funded yet. As Kevin said earlier, one of the reasons why our funded backlog is nearly the same as last quarter and did not grow as much is because there are two things that have happened.

Speaker #4: The government shutdown put employees of the government not coming to the office and being able to actually put contracts and award things.

Speaker #4: But the bigger problem was that, because of the continuing resolution in the budget that just passed with a big, beautiful bill, those dollars have not made it into the accounts of our customers to be able to then award task orders against those IDIQs.

Wahid Nawabi: But the bigger problem was that because of the continuing resolution and the budget that just passed with a big, beautiful bill, those dollars have not made it into the accounts of our customers to be able to then award task orders against those IDIQs. So we expect a significant number of additional funded task orders in Q3 and Q4, all of which is going to improve our backlog and will allow us to deliver more products and more revenue in the third and fourth quarter this year. Additionally, it will set us up really well for fiscal year 2027. We're not ready to provide any guidance for that yet, but that is going to be benefiting from the demand that's coming our way in terms of task orders and more funding. Sounds great. Thanks, everyone. Thank you, Louis. Thank you, Louis. Thank you.

Speaker #4: So we expect a significant number of additional funded task orders in Q3 and Q4, all of which are going to improve our backlog and will allow us to deliver more products and more revenue in the third and fourth quarter this year.

So we expect a significant number of additional funded task orders in Q3 and Q4, all of which is going to improve our backlog and will allow us to deliver more products and more revenue in the third and fourth quarter this year. Additionally, it will set us up really well for fiscal year 2027. We're not ready to provide any guidance for that yet, but that is going to be benefiting from the demand that's coming our way in terms of task orders and more funding.

Speaker #4: Additionally, we'll set us up really well for fiscal year 2027. We're not ready to provide any guidance for that yet, but that is going to benefit from the demand that's coming our way in terms of task orders and more funding.

Louie DiPalma: Sounds great. Thanks, everyone.

Speaker #8: Sounds great.

Speaker #8: Thanks, everyone. Thank you, Louis.

Kevin McDonnell: Thank you, Louie.

Wahid Nawabi: Thank you, Louie.

Operator: Thank you. Our next question comes from Ken Herbert with RBC Capital Markets. Please proceed.

Speaker #1: Thank you, Louis. Our next question comes from Ken Herbert with RBC Capital Markets.

Wahid Nawabi: Our next question comes from Ken Herbert with RBC Capital Markets. Please proceed. Hey, guys. This is Steve Strakos for Ken Herbert. Could you maybe discuss the margin profile of the SCD&E segment? Is there maybe a time when you think that the adjusted EBITDA will be break-even? Oh, yes. It'll continue to grow throughout the year. I mean, they were probably the most impacted by the government shutdown of any of our businesses. And they also had some delays in some of their receipts for their revenue recognition on their system. So they'll definitely be on track as we move forward throughout the year. And Peter, also, we strongly believe in that business. It is a very profitable, reliable, and consistent business and business model. Both of those two businesses in the long run are going to be profitable like they were in the past.

Speaker #1: proceed. Hey, you guys.

Steve Strackhouse: Hey, guys. This is Steve Strackhouse for Ken Herbert. Could you maybe discuss the margin profile of the SCD&E segment? Is there maybe a time when you think that the adjusted EBITDA will be break-even?

Speaker #9: This is Steve Strakowson for Ken Herbert. Could you maybe discuss the margin profile of the SCD&E segment? Is there maybe a time when you think that the adjusted EBITDA will be breakeven?

Kevin McDonnell: Oh, yes. It'll continue to grow throughout the year. I mean, they were probably the most impacted by the government shutdown of any of our businesses. And they also had some delays in some of their receipts for their revenue recognition on their system. So they'll definitely be on track as we move forward throughout the year.

Speaker #5: Oh, yes. It'll continue to grow throughout the year. I mean, they were probably the most impacted by the government shutdown of any of our businesses.

Speaker #5: And they also had some delays in some of their receipts for their revenue recognition on their system. So, they'll definitely be on track as we move forward throughout the year.

Wahid Nawabi: And Steve, also, we strongly believe in that business. It is a very profitable, reliable, and consistent business and business model. Both of those two businesses in the long run are going to be profitable like they were in the past. There are going to be just these lumps of fluctuations that happen, but the businesses' models are sound. They're very reliable in that regard, and we expect them to actually improve in Q3 and Q4 as we go forward.

Speaker #4: And Peter, we also strongly believe in that business. It is a very profitable, reliable, consistent business and business model. Both of those two businesses, in the long run, are going to be profitable like they were in the past.

Speaker #4: They're going to be just these lumps of fluctuations that happen. But the business models are sound. They're very reliable in that regard. We expect them to actually improve in Q3 and Q4 as we go forward.

Wahid Nawabi: There are going to be just these lumps of fluctuations that happen, but the businesses' models are sound. They're very reliable in that regard, and we expect them to actually improve in Q3 and Q4 as we go forward. Yeah. And their product mix is going to increase over their service mix. So that is going to drive their EBITDA margins up. And I'm assuming the next piece of my question kind of goes hand in hand. But can you talk about the free cash for maybe the second half of the year, or do you have kind of a full-year outlook for it as well? Well, we've always tried to say that we can get our EBITDA cash conversion over 50% as the goal for the year, and I still believe that's an achievable goal. All right. Thanks so much, guys. Thank you, Pete.

Speaker #5: Yeah. And their product mix is going to increase over their service mix, so that is going to drive their EBITDA margins.

Kevin McDonnell: Yeah. And their product mix is going to increase over their service mix. So that is going to drive their EBITDA margins up.

Speaker #5: up.

Steve Strackhouse: And I'm assuming the next piece of my question kind of goes hand in hand. But can you talk about the free cash for maybe the second half of the year, or do you have kind of a full-year outlook for it as well?

Speaker #9: And I'm

Speaker #9: Assuming the next piece of my question kind of goes hand in hand, can you talk about the free cash flow for maybe the second half of the year?

Speaker #9: Or do you have kind of a full year outlook for it as well?

Kevin McDonnell: Well, we've always tried to say that we can get our EBITDA cash conversion over 50% as the goal for the year, and I still believe that's an achievable goal.

Speaker #5: Well, we've always tried to say that we can get our EBITDA cash conversion over 50% as the goal for the year, and I still believe that's achievable.

Speaker #5: goal. All right.

Steve Strackhouse: All right. Thanks so much, guys.

Speaker #9: Thanks so much,

Speaker #9: guys. Thank you,

Thank you, Steve.

Speaker #4: Pete.

Speaker #1: Our next question, one moment please. Comes from Andrew Madrid with BTIG. Please.

Wahid Nawabi: Our next question, one moment, please, comes from Andre Madrid with BTIG. Please proceed. Hey, everyone. Thanks for taking my question. Hey, Andre. How are you? Good. Thank you. I wanted to dive a little bit deeper into the almost $900 million Army contract IDIQ that you guys got. I think the initial award had said that it was pretty much exclusively small UAS, and then you guys announced earlier this week that it also included TUAS, namely the Titan. I mean, can you tell us more about what the international opportunity looks like for these TUAS platforms? I think this is about one of the first times we've really heard about it. Also, can LOCUST be sold internationally? And then I guess also broadly, just how should we think about the margin distinction between domestic and international CUAS sales?

Operator: Our next question, one moment, please, comes from Andre Madrid with BTIG. Please proceed.

Speaker #1: proceed. Hey, everyone.

Andre Madrid: Hey, everyone. Thanks for taking my question.

Speaker #8: Thanks for taking my question.

Wahid Nawabi: Hey, Andre. How are you?

Speaker #4: Hey, Andre, how are

Speaker #4: you? Good.

Andre Madrid: Good. Thank you. I wanted to dive a little bit deeper into the almost $900 million Army contract IDIQ that you guys got. I think the initial award had said that it was pretty much exclusively small UAS, and then you guys announced earlier this week that it also included TUAS, namely the Titan. I mean, can you tell us more about what the international opportunity looks like for these TUAS platforms? I think this is about one of the first times we've really heard about it. Also, can LOCUST be sold internationally? And then I guess also broadly, just how should we think about the margin distinction between domestic and international CUAS sales?

Speaker #8: Thank you. I wanted to dive a little bit deeper into the almost $900 million Army contract IDIQ that you guys got. I think the initial award had said that it was pretty much exclusively small UAS, and then you guys announced earlier this week that it also included CUAS, namely the Titan.

Speaker #8: I mean, can you tell us more about what the international opportunity looks like for these CUAS platforms? I think this is one of the first times we've really heard about it.

Speaker #8: Also, can Locus be sold internationally? And then I guess also, just how should we think about the margin distinction between domestic and international CUAS?

Speaker #8: sales? So,

Speaker #4: Andre, yes, the nearly $900 million sole source IDIQ contract multi-year, of course, from the U.S. Army for our products now includes Raven, Puma AE, and Puma LE. But we could also sell our Titan counter UAS solutions as well as potentially in the future the Locus direct energy solutions.

Wahid Nawabi: So, Andre, yes, the nearly $900 million sole-source IDIQ contract, multi-year, of course, from the US Army for our products now includes Raven, Puma AE, Puma LE, but we could also sell our Titan counter-UAS solutions, as well as potentially in the future, the LOCUST directed energy solutions. This is a significant milestone because the US Army could have purchased these things under the existing contracts that we have, but they chose to actually add an additional contract with an additional nearly $900 million ceiling for it to allow us to deliver more products over the next three to four years to our international customers. So that's very positive news. Secondly, the margins for international sales, historically and in the future, will continue to be slightly more favorable than the domestic markets. Those customers do not buy as much as US.

Speaker #4: This is a significant milestone because the U.S. Army could have purchased these items under the existing contracts that we have, but they chose to actually add an additional contract with an additional $900 million ceiling for it to allow us to deliver more products over the next couple of three to four years to our international customers.

Speaker #4: So that's very positive news. Secondly, the margins for international sales, historically and in the future, will continue to be slightly more favorable than the domestic markets.

So that's very positive news. Secondly, the margins for international sales, historically and in the future, will continue to be slightly more favorable than the domestic markets. Those customers do not buy as much as US DoD, and generally, the margins are a little bit better. If we sell FMS, the margins are not a lot better. The best margins are international DCS sales, but FMS has less expenses too because we do not have the responsibility for exporting it. The US military does. So we deliver the product to the US military, and they deliver that to the customer, the international customer. The market opportunity internationally is massive for us.

Speaker #4: Those customers do not buy as much as the U.S. DOD, and generally the margins are a little bit better. If we sell FMS, the margins are not a lot better.

Wahid Nawabi: DoD, and generally, the margins are a little bit better. If we sell FMS, the margins are not a lot better. The best margins are international DCS sales, but FMS has less expenses too because we do not have the responsibility for exporting it. The US military does. So we deliver the product to the US military, and they deliver that to the customer, the international customer. The market opportunity internationally is massive for us. Really, we're at the beginning phases of that for our counter-UAS, for our directed energy, for our Switchblade, for our one-way attack, and for our SCAR Badger systems that we have in our product portfolio. We're just scratching the surface on those items, and some of them are literally just starting with no international sales. The area we're really strong is our small UAS, but we've got tremendous potential here.

Speaker #4: The best margins are international DCS sales. However, FMS has lower expenses too because we do not have the responsibility for exporting it; the U.S. military does.

Speaker #4: So, we deliver the product to the U.S. military, and they deliver that to the international customer. The market opportunity internationally is massive for us.

Speaker #4: Really, we're at the beginning phases of that for our counter-UAS, for our direct energy, for our Switchblade, for our one-way attack, and for our SCAR Badger systems that we have in our product portfolio.

Really, we're at the beginning phases of that for our counter-UAS, for our directed energy, for our Switchblade, for our one-way attack, and for our SCAR Badger systems that we have in our product portfolio. We're just scratching the surface on those items, and some of them are literally just starting with no international sales. The area we're really strong is our small UAS, but we've got tremendous potential here. I expect the international market over the next several years to grow significantly and be a major contributor.

Speaker #4: We're just scratching the surface on those items, and some of them are literally just starting with no international sales. The area we're really strong in is our small UAS, but we've got tremendous potential here.

Speaker #4: I expect the international market over the next several years to grow significantly and be a major.

Wahid Nawabi: I expect the international market over the next several years to grow significantly and be a major contributor. Got it. Got it. No, that's super helpful. And then maybe just to pivot to Switchblade, I think you said that by next year, you could support capacity of $2 billion sales. I think previously, the number that you had disclosed was about $1 billion. I just wanted to see what might be driving that difference. Sure. So, Andre, as we keep building these new factories, we're also improving a lot in terms of automation and ability for us to produce and ramp up production. So as you know, we're ramping up production for Switchblade significantly already. We've already tripled, doubled, and tripled every year for the last couple of years, and we're going to continue to improve it even further.

Speaker #4: contributor. Got it.

Andre Madrid: Got it. Got it. No, that's super helpful. And then maybe just to pivot to Switchblade, I think you said that by next year, you could support capacity of $2 billion sales. I think previously, the number that you had disclosed was about $1 billion. I just wanted to see what might be driving that difference.

Speaker #8: Got it. No, that's super helpful. And then maybe just to pivot to Switchblade, I think you said that by next year, you could support capacity of $2 billion in sales.

Speaker #8: I think previously the number that you had disclosed was about $1 billion; I just wanted to see what might be driving that difference.

Wahid Nawabi: Sure. So, Andre, as we keep building these new factories, we're also improving a lot in terms of automation and ability for us to produce and ramp up production. So as you know, we're ramping up production for Switchblade significantly already. We've already tripled, doubled, and tripled every year for the last couple of years, and we're going to continue to improve it even further. The new facility that we have now in Salt Lake City, which is going to come online later next calendar year, towards the end of next calendar year, has the potential to go above $2 billion worth of production with multiple shifts.

Speaker #4: Sure. So, Andre, as we keep building these new factories, we're also improving a lot in terms of automation and our ability to produce and ramp up production.

Speaker #4: So we're, as you know, ramping up production for Switchblades significantly already. We've already tripled, doubled, and tripled every year for the last couple of years.

Speaker #4: And we're going to continue to improve it even further. The new facility that we have now in Salt Lake City, which is going to come online later next calendar year, towards the end of next calendar year, has the potential to go above $2 billion worth of production with multiple shifts.

Wahid Nawabi: The new facility that we have now in Salt Lake City, which is going to come online later next calendar year, towards the end of next calendar year, has the potential to go above $2 billion worth of production with multiple shifts. If we get to that level, it's going to be well over a $2 billion factory. And I expect that to even go higher than that because there's so much more potential room for growth in terms of our automation and efficiencies in the production processes. Last thing I want to mention about that is that that factory is also very flexible. We can produce any variance of switchblade, but we could also produce other products, such as our one-way attack product solutions, our non-lethal UAS, and other platforms that we have, such as Freedom Eagle One, etc., etc.

If we get to that level, it's going to be well over a $2 billion factory. And I expect that to even go higher than that because there's so much more potential room for growth in terms of our automation and efficiencies in the production processes. Last thing I want to mention about that is that that factory is also very flexible. We can produce any variance of switchblade, but we could also produce other products, such as our one-way attack product solutions, our non-lethal UAS, and other platforms that we have, such as Freedom Eagle One, etc., etc. So we're setting the factory to be flexible and agile for lots of our products, and we can shift production on that factory as we go forward.

Speaker #4: If we get to that level, it's going to be well over a $2 billion factory. I expect that to even go higher than that because there's so much more potential room for growth in terms of our automation and efficiencies in the production processes.

Speaker #4: Last thing I want to mention about that is that the factory is also very flexible. We can produce any variants of Switchblade, but we could also produce other products such as our one-way attack product solutions and our non-lethal UAS, as well as other platforms that we have, such as Freedom Eagle One, etc.

Speaker #4: So, we’re setting the factory to be flexible and agile for lots of our products, and we can shift production in that factory as we go.

Wahid Nawabi: So we're setting the factory to be flexible and agile for lots of our products, and we can shift production on that factory as we go forward. Got it. Appreciate the colors, always. Thanks, Wahid. Thank you, Andre. Thank you. Our next question comes from the line of Trevor Walsh with Citizens. Please proceed. Great. Hey, team. Thanks for taking the questions. Maybe just touching on AV Halo a little bit. Wahid, great to see the new products or the new, I guess, modules being added on to that. Can you maybe just take a step back, though, around that whole product opportunity?

Speaker #4: forward. Got it.

Andre Madrid: Got it. Appreciate the colors, always. Thanks, Wahid.

Speaker #8: Appreciate the colors, always. Thanks, Wahid.

Wahid Nawabi: Thank you, Andre.

Speaker #4: Thank you, Andre.

Operator: Thank you. Our next question comes from the line of Trevor Walsh with Citizens. Please proceed.

Speaker #1: Thank you. Our next question comes from the line of Trevor Walsh with Citizens. Please proceed.

Trevor Walsh: Great. Hey, team. Thanks for taking the questions. Maybe just touching on AV Halo a little bit. Wahid, great to see the new products or the new, I guess, modules being added on to that. Can you maybe just take a step back, though, around that whole product opportunity? Just given all of the different systems from both AV as well as the other providers in the ecosystem that you're partnering and OEMing with, and they're able to kind of link in, how much of that still just needs to work its way through the system in terms of getting those systems out into the field so that the customer can actually just know what's the right sort of overall software package to go with those?

Speaker #9: Great. Hey team, thanks for taking the questions. Maybe just touching on AV Halo a little bit. Wahid, great to see the new products, or the new, I guess, modules being added onto that.

Speaker #9: Can you maybe just take a step back, though, around that whole product opportunity? Just given all of the different systems from both AV, as well as the other providers in the ecosystem that you're partnering and OEMing with, and they're able to kind of link in, how much of that still just needs to work its way through the system in terms of getting those systems out into the field so that the customer can actually just know what's the right sort of overall software package to go with those?

Wahid Nawabi: Just given all of the different systems from both AV as well as the other providers in the ecosystem that you're partnering and OEMing with, and they're able to kind of link in, how much of that still just needs to work its way through the system in terms of getting those systems out into the field so that the customer can actually just know what's the right sort of overall software package to go with those? I guess it's another way of asking kind of if you have these wins around AV Halo now, but is there really a kind of much wider opportunity that's kind of going to, I guess, materialize later, again, once the actual hardware piece is a little bit more locked down, I guess. Does that make sense? Yes, of course, Trevor. So let me provide you some color on that.

Speaker #9: I guess it's another way of asking kind of if you have these winds s around AV Halo now, but is there really a kind of much wider opportunity that's kind of going to, I guess, materialize later?

I guess it's another way of asking kind of if you have these wins around AV Halo now, but is there really a kind of much wider opportunity that's kind of going to, I guess, materialize later, again, once the actual hardware piece is a little bit more locked down, I guess. Does that make sense?

Speaker #9: Again, once the actual hardware piece is a little bit more locked down, I guess. Does that make sense? Yes, of course, Trevor. So let me provide you some color on that.

Wahid Nawabi: Yes, of course, Trevor. So let me provide you some color on that. First of all, I'm really excited about the AV Halo suite of software solutions. It's not just one particular product. Think of it as a very robust and broad portfolio of solution sets, a software stack, and an ecosystem that provides lots and lots of different capabilities with different modules, such as AV Halo Command, AV Halo Cortex, AV Halo Pinpoint, etc., etc. So we launched two new modules, number one, and we're going to continue to launch more new modules to that. The best way to think about it in a very simplistic way is like the Microsoft Office suite of products: Excel, Word, Outlook.

Speaker #9: First of all, I'm really excited about the AV Halo suite of software solutions. It's not just one particular product. Think of it as a very robust and broad portfolio of solution sets, a software stack, and an ecosystem that provides lots and lots of different capabilities with different modules.

Wahid Nawabi: First of all, I'm really excited about the AV Halo suite of software solutions. It's not just one particular product. Think of it as a very robust and broad portfolio of solution sets, a software stack, and an ecosystem that provides lots and lots of different capabilities with different modules, such as AV Halo Command, AV Halo Cortex, AV Halo Pinpoint, etc., etc. So we launched two new modules, number one, and we're going to continue to launch more new modules to that. The best way to think about it in a very simplistic way is like the Microsoft Office suite of products: Excel, Word, Outlook. All these different modules are underneath the Office suite, right? The same thing applies to AV Halo. AV Halo has several modules.

Speaker #9: Such as AV Halo, Halo Command, AV Halo Cortex, AV Halo Pinpoint, etc. We launched two new modules, number one, and we're going to continue to launch more new modules to that.

Speaker #9: And the best way to think about it, in a very simplistic way, is like the Microsoft Office suite of products. Excel, Word, Outlook—all these different modules are underneath the Office suite, right?

All these different modules are underneath the Office suite, right? The same thing applies to AV Halo. AV Halo has several modules. In terms of deployment, we already have thousands, if not tens of thousands, of some of the modules already deployed in the field. That is the beauty of our system. That is all interoperable and integrated. And so what we've done is try to actually bring the ecosystem cohesively together and mesh it all together into one umbrella of software solution. Secondly, it is also a very open architecture. We can integrate with any other platform, including competitor platforms, and we can also talk to any other systems and other battle management systems.

Speaker #9: Same thing applies to AV Halo. AV Halo has several modules. In terms of deployment, we already have thousands, if not tens of thousands, of some of the modules already deployed in the field.

Wahid Nawabi: In terms of deployment, we already have thousands, if not tens of thousands, of some of the modules already deployed in the field. That is the beauty of our system. That is all interoperable and integrated. And so what we've done is try to actually bring the ecosystem cohesively together and mesh it all together into one umbrella of software solution. Secondly, it is also a very open architecture. We can integrate with any other platform, including competitor platforms, and we can also talk to any other systems and other battle management systems. And so our belief is that our solution set is incredibly not well understood yet, and we have a long way to go in terms of the opportunity set here over the next several years. One example of that success story is in my comments about the US.

Speaker #9: That is the beauty of our system. It's all interoperable and integrated. What we've done is try to actually bring the ecosystem cohesively together and mesh it all into one umbrella of software solution.

Speaker #9: Secondly, it is also a very open architecture. We can integrate with any other platform, including competitor platforms, and we can also communicate with any other systems and other battle management systems.

And so our belief is that our solution set is incredibly not well understood yet, and we have a long way to go in terms of the opportunity set here over the next several years. One example of that success story is in my comments about the US Army who selected us for the Human Machine Integrated Formation, HMIF program record. That is a very strategic and critical program. We competed with very large companies and small companies that are trying to copy our model, and we won. US Army selected us.

Speaker #9: And so our belief is that our solution set is incredibly not well understood yet. We have a long way to go in terms of the opportunity set here over the next several years.

Speaker #9: One example of that success story is in my comments about the U.S. Army, who selected us for the Human-Machine Integrated Formation (HMIF) program record.

Wahid Nawabi: Army who selected us for the Human Machine Integrated Formation, HMIF program record. That is a very strategic and critical program. We competed with very large companies and small companies that are trying to copy our model, and we won. US Army selected us. That means that the future battle space on the edge of the battlefield, the systems and the controllers that they're going to use to operate these robotic systems, whether on the ground, or air, on land, or sea, is going to be ours. We are open, interoperable, and we will integrate with many other systems that are there. So we got a lot more coming in this area, and I can't be more excited about it in the future. We already support multiple platforms with our AV Command.

Speaker #9: That is a very strategic and critical program. We competed with very large companies and small companies that are trying to copy our model, and we won.

Speaker #9: And the U.S. Army selected us. That means that the future battlespace on the edge of the battlefield, the systems and the controllers that they're going to use to operate these robotic systems, whether on the ground, in the air, or at sea, is going to be ours.

That means that the future battle space on the edge of the battlefield, the systems and the controllers that they're going to use to operate these robotic systems, whether on the ground, or air, on land, or sea, is going to be ours. We are open, interoperable, and we will integrate with many other systems that are there. So we got a lot more coming in this area, and I can't be more excited about it in the future.

Speaker #9: And we are open, interoperable, and we will integrate with many other systems that are there. And so we got a lot more coming in this area, and I can't be more.

Speaker #9: Excited about it in the future. And we already...

Kevin McDonnell: We already support multiple platforms with our AV Command.

Speaker #3: support multiple platforms. With

Speaker #3: Our AV command. We support not only our...

Wahid Nawabi: We support not only our own platforms. We support more competitor platforms today than our own, actually. And that's the testament to how open we are with our architecture and our platform for our customers. And that's one advantage that we have that most other systems are not that open. Great. Thanks so much, both, for the color. Appreciate it. You're welcome, Trevor. Thank you so much. Our next question comes from Jonathan Sigman with Stifel. Please proceed. Hey, good evening. Thank you for taking my question. Appreciate it. Thank you, Jonathan, for managing the shutdown. I thought that was great. And it's a really interesting time with signals flashing green here, with a lot of intent of where we want to spend money, but with a shutdown causing a real wrinkle. Historically, your January quarter hasn't been the strongest bookings quarter for you guys.

Speaker #4: On our own platforms, we support more competitor platforms today than our own, actually. And that's a testament to how open we are with our architecture and our platform for our customers.

Speaker #4: And that's one advantage that we have, that most other systems are not that open.

Trevor Walsh: Great. Thanks so much, both, for the color. Appreciate it.

Speaker #9: Great. Thanks so much, both, for the color. I appreciate it.

Wahid Nawabi: You're welcome, Trevor.

Speaker #4: You're welcome,

Speaker #4: Trevor.

Operator: Thank you so much. Our next question comes from Jonathan Sigman with Stifel. Please proceed.

Speaker #1: Thank you so

Speaker #1: Much. Our next question comes from Jonathan Sigman with Stifel. Please proceed.

Jonathan Siegmann: Hey, good evening. Thank you for taking my question. Appreciate it. Thank you, Jonathan, for managing the shutdown. I thought that was great. And it's a really interesting time with signals flashing green here, with a lot of intent of where we want to spend money, but with a shutdown causing a real wrinkle. Historically, your January quarter hasn't been the strongest bookings quarter for you guys. I'm just wondering if there's going to be some additional frictions this year you anticipate that we just can't catch up with all this pent-up demand and funded order. Is that a worry for you guys? Thank you.

Speaker #10: Hey, good evening. Thank you for taking my question. I appreciate it. Great job.

Speaker #4: Thank you, Jonathan.

Speaker #10: Managing the shutdown, I thought that was great. It's a really interesting time with signals flashing green here, indicating a lot of intent regarding where we want to spend money, but the shutdown is causing a real wrinkle.

Speaker #10: Historically, your January quarter hasn't been the strongest bookings quarter for you guys. I'm just wondering if there's going to be some additional frictions this year that you anticipate, such that we just can't catch up with all this pent-up demand and funded orders.

Wahid Nawabi: I'm just wondering if there's going to be some additional frictions this year you anticipate that we just can't catch up with all this pent-up demand and funded order. Is that a worry for you guys? Thank you. Yeah, Jonathan, that's a very well-put comment because the reason why we do not want to, or we hesitated to raise the guidance even more, is because there's still some timing risk on when we are going to get some of these task orders. The government came out of the shutdown, but still, the budget for the fiscal year is not fully approved. We have funding until January, end of January. And while we expect some task orders to come in, exactly when they're going to come in is anybody's guess. And so therefore, we expect we are confident that we're going to achieve our guidance that we've just provided.

Speaker #10: Is that a worry for you guys? Thank you.

Speaker #10: You. Yeah, Jonathan, that's a very ...

Wahid Nawabi: Yeah, Jonathan, that's a very well-put comment because the reason why we do not want to, or we hesitated to raise the guidance even more, is because there's still some timing risk on when we are going to get some of these task orders. The government came out of the shutdown, but still, the budget for the fiscal year is not fully approved. We have funding until January, end of January. And while we expect some task orders to come in, exactly when they're going to come in is anybody's guess. And so therefore, we expect we are confident that we're going to achieve our guidance that we've just provided.

Speaker #4: Well-put comment. The reason why we do not want to, or we hesitated to raise the guidance even more, is because there's still some timing risk on when we are going to get some of these task orders.

Speaker #4: The government came out of the shutdown, but still, the budget for the fiscal year is not fully approved. We have funding until the end of January.

Speaker #4: And while we expect some task orders to come in, exactly when they're going to come in is anybody's guess. Therefore, we are confident that we're going to achieve our guidance that we've just provided.

Anything above and beyond that, we're going to update you as we go in the next quarter. Lastly, we did really well. We are on track with our plans on Q1 and Q2, and we are exactly where we wanted to be despite the fact that the whole industry was dealing with a month of complete government shutdown. So I think our results are very good, and we're very pleased with our results, and we're looking forward to H2 of the year. We've got aggressive goals, but we're very confident that we can achieve that. We've got the capacity, we've got the team, and we've got the demand from the customer and the support from our customers to get it done.

Speaker #4: And anything above and beyond that, we're going to update you as we go in the next quarter. Lastly, we did very well. We are on track with our plans for the first quarter and second quarter, and we are exactly where we wanted to be, despite the fact that the whole industry was dealing with a month of complete government shutdown.

Wahid Nawabi: Anything above and beyond that, we're going to update you as we go in the next quarter. Lastly, we did really well. We are on track with our plans on Q1 and Q2, and we are exactly where we wanted to be despite the fact that the whole industry was dealing with a month of complete government shutdown. So I think our results are very good, and we're very pleased with our results, and we're looking forward to H2 of the year. We've got aggressive goals, but we're very confident that we can achieve that. We've got the capacity, we've got the team, and we've got the demand from the customer and the support from our customers to get it done. That's great. Thank you for the new details on the product lines. Appreciate it. Good to see you here. Thank you, Jonathan.

Speaker #4: And so I think our results are very good, and we're very pleased with our results. We're looking forward to the second half of the year.

Speaker #4: We've got aggressive goals, but we're very confident that we can achieve them. We've got the capacity, we have the team, and we have the demand from our customers, along with their support, to get it done.

Speaker #4: done. That's great.

Jonathan Siegmann: That's great. Thank you for the new details on the product lines. Appreciate it. Good to see you here.

Speaker #10: And thank you for the new details on the product lines. I appreciate it.

Speaker #4: Thank you, Jonathan.

Wahid Nawabi: Thank you, Jonathan.

Speaker #1: Thank you so much. Our next question comes from Austin Mueller with Canaccord Genuity. Please.

Wahid Nawabi: Thank you so much. Our next question comes from Austin Moeller with Canaccord Genuity. Please proceed. Hi, good afternoon, Wahid and Kevin. Just my first question here. Can you discuss how much of the backlog today is related to Ukraine and when that might convert? And similarly, how much of the backlog is from European allies ex-Ukraine? Well, Austin, we do not break down the specific backlog by customer regions or by specific products. What I can tell you is the following. We have de-risked and pivoted from our two years ago Ukraine demand almost entirely. It represents less than 5% of our revenue for the full year, number one. Number two, so far, we're on track with our plans, and international demand is still back and loaded a little bit because of the government shutdown and the contracting process.

Operator: Thank you so much. Our next question comes from Austin Moeller with Canaccord Genuity. Please proceed.

Speaker #1: Hi, good afternoon, Wahid, and

Austin Moeller: Hi, good afternoon, Wahid and Kevin. Just my first question here. Can you discuss how much of the backlog today is related to Ukraine and when that might convert? And similarly, how much of the backlog is from European allies ex-Ukraine?

Speaker #11: Kevin, just my first question here: can you discuss how much of the backlog today is related to Ukraine and when that might convert? And similarly, how much of the backlog is from European allies?

Speaker #11: ex-Ukraine? Well,

Wahid Nawabi: Well, Austin, we do not break down the specific backlog by customer regions or by specific products. What I can tell you is the following. We have de-risked and pivoted from our two years ago Ukraine demand almost entirely. It represents less than 5% of our revenue for the full year, number one. Number two, so far, we're on track with our plans, and international demand is still back and loaded a little bit because of the government shutdown and the contracting process. Some of those FMS sales have not made it yet to actual contracts to us.

Speaker #4: Austin, we do not break down the specific backlog by customer regions or by specific products. What I can tell you is the following: we have de-risked and pivoted from our two years ago Ukraine demand almost entirely.

Speaker #4: It represents less than 5% of our revenue for the full year. Number one. Number two, so far, we're on track with our plans.

Speaker #4: International demand is still back-loaded a little bit because of the government shutdown and the contracting process. Some of those FMS sales have not made it yet to actual contracts for us.

Wahid Nawabi: Some of those FMS sales have not made it yet to actual contracts to us. Do we continue to get contracts? Yes. But there's a lot more to come towards the second half as well as the next fiscal year. Overall, our backlog is pretty strong. $1.1 billion worth of funded backlog. We had a $1.4 billion worth of funded bookings. And I mean, very strong orders and backlog and visibility numbers given where we are with the quarter. Yeah. We've been saying consistently that Ukraine should be less than 10% of our revenue for the year, and there would be no additional orders in our guidance for Ukraine for this year. So if we did see some additional business from Ukraine, that would be positive for us. But we're not counting on any additional new orders for Ukraine. On our forecast? In our forecast. Okay.

Speaker #4: Do we continue to get contracts? Yes. But there's a lot more to come towards the second half as well as the next fiscal year.

Do we continue to get contracts? Yes. But there's a lot more to come towards the second half as well as the next fiscal year. Overall, our backlog is pretty strong. $1.1 billion worth of funded backlog. We had a $1.4 billion worth of funded bookings. And I mean, very strong orders and backlog and visibility numbers given where we are with the quarter.

Speaker #4: Overall, our backlog is pretty strong. We have a funded backlog worth $1.1 billion, and we achieved $1.4 billion in funded bookings. This represents very strong orders, backlog, and visibility numbers, especially given where we are in the quarter.

Speaker #3: Yeah, we've been saying consistently that Ukraine should be less than 10% of our revenue for the year, and there would be no additional orders in our guidance for Ukraine for this year.

Kevin McDonnell: Yeah. We've been saying consistently that Ukraine should be less than 10% of our revenue for the year, and there would be no additional orders in our guidance for Ukraine for this year. So if we did see some additional business from Ukraine, that would be positive for us. But we're not counting on any additional new orders for Ukraine.

Speaker #3: So if we did see some additional business from Ukraine, that would be positive for us. But we're not counting on any additional new orders for Ukraine.

Wahid Nawabi: On our forecast.

Speaker #4: On our

Speaker #4: forecast.

Speaker #3: In our

Kevin McDonnell: In our forecast.

Austin Moeller: Okay. And just to follow up, I know the genesis of Red Dragon was to enable international sales by having an open payload bay that was payload agnostic and didn't have ammunition in it. But do you expect that Red Dragon could replace or take additional share from the Switchblade 600 over time with the US military in a long-range anti-armor or anti-fixed installation role?

Speaker #11: Okay. And just to follow

Wahid Nawabi: And just to follow up, I know the genesis of Red Dragon was to enable international sales by having an open payload bay that was payload agnostic and didn't have ammunition in it. But do you expect that Red Dragon could replace or take additional share from the Switchblade 600 over time with the US military in a long-range anti-armor or anti-fixed installation role? Austin, no. The short answer for that question is no. We do not expect that to take share away from Switchblade, primarily because they're designed for very different mission sets. The missions that loading munitions such as Switchblade 300, 600, and now 400 do are very different than the missions of one-way attack drones such as our Red Dragon. And our family of Red Dragon is expanding. We believe both of those two product lines are going to grow significantly over the next few years.

Speaker #11: I know the genesis of Red Dragon was to forecast, enable international sales by having an open payload bay that was payload-agnostic and didn't have a munition in it.

Speaker #11: But do you expect that Red Dragon could replace or take additional share from the Switchblade 600 over time with the U.S. military in a long-range anti-armor or anti-fixed installation?

Speaker #11: role? Austin,

Wahid Nawabi: Austin, no. The short answer for that question is no. We do not expect that to take share away from Switchblade, primarily because they're designed for very different mission sets. The missions that loading munitions such as Switchblade 300, 600, and now 400 do are very different than the missions of one-way attack drones such as our Red Dragon. And our family of Red Dragon is expanding. We believe both of those two product lines are going to grow significantly over the next few years. The demand for those systems is very robust from more than one service and more than one customer and country.

Speaker #4: No. The short answer for that question is no, we do not expect that to take share away from Switchblade, primarily because they're designed for very different mission sets.

Speaker #4: The missions involving loading munitions such as Switchblade 300, 600, and now 400 are very different from the missions of one-way attack drones like our Red Dragon.

Speaker #4: And our family of Red Dragon is expanding. We believe both of those two product lines are going to grow significantly over the next few years.

Speaker #4: The demand for those systems is very robust from more than one service, and more than one customer and country. And so, I think we're going to continue to see significant growth in both categories.

Wahid Nawabi: The demand for those systems is very robust from more than one service and more than one customer and country. And so I think we're going to continue to see significant growth on both categories. They're actually complementary to each other in many ways as to how they engage with different targets and different missions for our customers. Yeah. And our current volumes, we're only going to see growth in all those products. Red Dragon could potentially grow faster, but that doesn't necessarily mean it's taking away share from the other Switchblade products. Okay. That's very interesting. Thank you for the details. You're welcome, Austin. Thank you so much. Our next question comes from the line of Pete Skibitski with Alembic Global. Please proceed. Hey, good afternoon, guys. Hi, Pete. Wahid, just wonder if you could level set us.

And so I think we're going to continue to see significant growth on both categories. They're actually complementary to each other in many ways as to how they engage with different targets and different missions for our customers.

Speaker #4: They're actually complementary to each other in many ways, as to how they engage with different targets and different missions for our customers.

Speaker #3: Yeah, and our current volumes, we're only going to see growth in all those products. Red Dragon could potentially grow faster, but that doesn't necessarily mean it's taking away share from the other Switchblade.

Kevin McDonnell: Yeah. And our current volumes, we're only going to see growth in all those products. Red Dragon could potentially grow faster, but that doesn't necessarily mean it's taking away share from the other Switchblade products.

Speaker #3: products.

Speaker #3: products. Okay, that's very interesting.

Austin Moeller: Okay. That's very interesting. Thank you for the details.

Wahid Nawabi: You're welcome, Austin.

Speaker #4: Thank you for the details. Welcome, Austin.

Operator: Thank you so much. Our next question comes from the line of Pete Skibitski with Alembic Global. Please proceed.

Speaker #1: Thank you so much. Our next question comes from the line of Pete Skibitsky with Alembic Global. Please proceed.

Pete Skibitski: Hey, good afternoon, guys.

Speaker #10: Hey, good afternoon, guys.

Wahid Nawabi: Hi, Pete.

Speaker #3: Hi,

Speaker #3: Pete: Wahid, just wondering if you...

Pete Skibitski: Wahid, just wonder if you could level set us. I'm still a little confused with where we're at with the Army long-range reconnaissance. I know that you guys, as well as EDGE, both got contracts in August, and then you announced another award yesterday. Are you guys sole source now on LRR with the P550, or is there going to be kind of an ongoing competition over the next few years?

Speaker #10: Could you level set us? I'm still a little confused with where we're at with the Army long-range reconnaissance. I know that you guys, as well as Edge, both got contracts in August, and then you announced another award yesterday.

Wahid Nawabi: I'm still a little confused with where we're at with the Army long-range reconnaissance. I know that you guys, as well as EDGE, both got contracts in August, and then you announced another award yesterday. Are you guys sole source now on LRR with the P550, or is there going to be kind of an ongoing competition over the next few years? More the latter, Pete. So what the Army has done, and this is consistent with many programs within the US Army and even other branches of the US Department of War, is that the traditional construct and concept of a program of record single winner probably is not going to be that popular and that common. What they're going to do is they're going to pick at least two players, and from those two players, they want to field some systems and see who performs better.

Speaker #10: Are you guys sole source now on LRR with the P550, or is there going to be kind of an ongoing competition over the next few years?

Wahid Nawabi: More the latter, Pete. So what the Army has done, and this is consistent with many programs within the US Army and even other branches of the US Department of War, is that the traditional construct and concept of a program of record single winner probably is not going to be that popular and that common. What they're going to do is they're going to pick at least two players, and from those two players, they want to field some systems and see who performs better. As the performance of that system is better, that vendor or that supplier most likely is going to get the lion's share of the volume of that program or requirement or capability gap.

Speaker #4: More the latter, Pete. So what the Army has done—and this is consistent with many programs within the U.S. Army and even other branches of the U.S. Department of War Services—is that the traditional construct and concept of a program of record single winner probably is not going to be that popular in that common.

Speaker #4: What they’re going to do is they’re going to pick at least two players, and from those two players, they want to field some systems and see who performs better.

Speaker #4: As the performance of that system is better, that vendor or that supplier most likely is going to get the lion's share of the volume of that program, requirement, or capability gap.

Wahid Nawabi: As the performance of that system is better, that vendor or that supplier most likely is going to get the lion's share of the volume of that program or requirement or capability gap. We believe our solution set is the best performing. We have very strong feedback from the customer that the customer is extremely satisfied with our systems. Yes, we announced a couple of orders and awards, but we expect more. We're actually expanding and ramping up production in anticipation of more P550 orders from the US Army as well as additional international customers. We believe that the P550 product is a billion-dollar-plus franchise for the company over the next several years. We are such a strong believer in that product. I am personally very, very high on that product. Now, in terms of going forward, is it going to be just us? Most likely not.

We believe our solution set is the best performing. We have very strong feedback from the customer that the customer is extremely satisfied with our systems. Yes, we announced a couple of orders and awards, but we expect more. We're actually expanding and ramping up production in anticipation of more P550 orders from the US Army as well as additional international customers. We believe that the P550 product is a billion-dollar-plus franchise for the company over the next several years. We are such a strong believer in that product. I am personally very, very high on that product.

Speaker #4: We believe our solution set is the best performing. We have very strong feedback from the customer that the customer is extremely satisfied with our systems.

Speaker #4: Yes, we announced a couple of orders and awards, but we expect more. We're actually expanding and ramping up production in anticipation of more P550 orders from the U.S. Army, as well as additional international customers.

Speaker #4: We believe that the P550 product is a billion-dollar-plus franchise for the company over the next several years. We are such strong believers in that product.

Speaker #4: I am personally very, very high on that product. Now, in terms of going forward, is it going to be just us? Most likely not.

Now, in terms of going forward, is it going to be just us? Most likely not. Do we expect to get a very large share of that spend? Yes. We expect to get a large share of it, and that's probably going to be consistent across multiple programs, not just the LRR.

Speaker #4: Do we expect to get a very large share of that spend? Yes, we expect to get a large share of it. And that's probably going to be consistent across multiple programs, not just the...

Wahid Nawabi: Do we expect to get a very large share of that spend? Yes. We expect to get a large share of it, and that's probably going to be consistent across multiple programs, not just the LRR. Got it. Okay. Very helpful. I appreciate that. And just on the P550 specifically, are you cleared to export that internationally already? And if so, how many countries can you export it to, and how do you expect that to grow? Yes, Pete. That's a great question. And that product line was developed from the ground up, number one, to be MOSA or Modular Open Systems Approach, interoperable, and compatible and compliant. One. Two, it is developed primarily all with our own R&D dollars. So it's a non-ITAR product in its base configuration.

Speaker #4: LRR. Got it.

Pete Skibitski: Got it. Okay. Very helpful. I appreciate that. And just on the P550 specifically, are you cleared to export that internationally already? And if so, how many countries can you export it to, and how do you expect that to grow?

Speaker #10: Okay, very helpful. I appreciate that. And just on the P550 specifically, are you cleared to export that internationally already? And if so, how many countries can you export it to?

Speaker #10: And how do you expect that to grow?

Wahid Nawabi: Yes, Pete. That's a great question. And that product line was developed from the ground up, number one, to be MOSA or Modular Open Systems Approach, interoperable, and compatible and compliant. One. Two, it is developed primarily all with our own R&D dollars. So it's a non-ITAR product in its base configuration. There are modules within it that can make it ITAR, but we believe that we can sell the P550 to almost every customer that we sell our Pumas and Ravens and other products today.

Speaker #4: Yes, Pete, that's a great question. And that product line was developed from the ground up. Number one, to be MOSA, or Modular Open Systems Approach, interoperable and compatible and compliant.

Speaker #4: A, two, it is developed primarily all with our own R&D dollars. So it's a non-ITAR product, and its base configuration. There are modules within it that can make it ITAR.

Wahid Nawabi: There are modules within it that can make it ITAR, but we believe that we can sell the P550 to almost every customer that we sell our Pumas and Ravens and other products today. So the market for P550 internationally is equally as large, if not larger, than our domestic market. And I believe that we're going to have several customers internationally that's going to come online and place orders for that capability later this fiscal year and even beyond this fiscal year. Okay. Great. Thanks for the call. You're welcome, Pete. Thank you so much. Our next question comes from Colin Canfield with Cantor. Please proceed. Hey, thank you for the question. Maybe just bringing it all home to cash and profitability.

Speaker #4: But we can believe that we can sell the P550 to almost every customer that we sell our PUMAs, RAVENs, and other products to today.

Speaker #4: So, the market for P550 internationally is equally as large, if not larger, than our domestic market. I believe that we're going to have several customers internationally that are going to come online and place orders for that capability later this fiscal year and even beyond this fiscal year.

So the market for P550 internationally is equally as large, if not larger, than our domestic market. And I believe that we're going to have several customers internationally that's going to come online and place orders for that capability later this fiscal year and even beyond this fiscal year.

Pete Skibitski: Okay. Great. Thanks for the color.

Speaker #10: Okay, great. Thanks for the call.

Wahid Nawabi: You're welcome, Pete.

Speaker #4: You're welcome,

Speaker #4: Pete. Thank you so

Operator: Thank you so much. Our next question comes from Colin Canfield with Cantor. Please proceed.

Speaker #1: Much. Our next question comes from Colin Canfield with Cantor. Please proceed.

Colin Canfield: Hey, thank you for the question. Maybe just bringing it all home to cash and profitability. If we can kind of think about the building blocks of EBITDA, I think the Q4 guidance on adjusted EBITDA assumes roughly same ballpark as kind of combined whole company pro forma results as last year. So maybe just kind of walk us through how you think of the progression on SG&A and essentially kind of how we think about that EBITDA step up versus the supply chain kind of dynamics that you're focusing on. And then bridging that over, I think streets probably close to free cash will break even this year.

Speaker #6: Hey, thank you for the question. Maybe just bring it all home to cash and profitability. If we can kind of think about the building blocks of EBITDA, I think the Q4 guidance on adjusted EBITDA assumes roughly the same ballpark as kind of combined whole company pro forma results as last year.

Wahid Nawabi: If we can kind of think about the building blocks of EBITDA, I think the Q4 guidance on adjusted EBITDA assumes roughly same ballpark as kind of combined whole company pro forma results as last year. So maybe just kind of walk us through how you think of the progression on SG&A and essentially kind of how we think about that EBITDA step up versus the supply chain kind of dynamics that you're focusing on. And then bridging that over, I think streets probably close to free cash will break even this year. So is it fair to assume that kind of the timing and the shift that you talk about requires investment, or is it fair to assume that this kind of quick book and turn or, excuse me, shipping book and ship business can allow you to hit something like that in terms of free cash flow? Thanks.

Speaker #6: So maybe just kind of walk us through how you think of the progression on SG&A and essentially how we think about that EBITDA step-up versus the supply chain kind of dynamics that you're focusing on.

Speaker #6: And then bridging that over, I think streets probably close to free cash will break even this year. So is it fair to assume that kind of the timing and the shift that you talk about requires investment, or is it fair to assume that this kind of quick book and turn or excuse me, shipping kind of book and ship business can allow you to hit something like that in terms of free cash flow?

So is it fair to assume that kind of the timing and the shift that you talk about requires investment, or is it fair to assume that this kind of quick book and turn or, excuse me, shipping book and ship business can allow you to hit something like that in terms of free cash flow? Thanks.

Speaker #6: Thanks.

Speaker #4: So

Speaker #4: So, Colin, let me just add some color to this. We do expect Q4 to be the largest quarter, as we provided some color: almost 55% of our second half revenues are in the fourth quarter, number one.

Wahid Nawabi: So, Colin, let me just add some color to this. We do expect Q4 to be the largest quarter as we provided some color. Almost 55% of our second half revenues are in the fourth quarter, number one. So the overall volume in fourth quarter is higher, number one. Number two, the mix keeps getting more favorable in the fourth quarter from Q1 to Q2 to Q3, and Q4. So that's also a positive trend that's affecting Q4. We expect SG&A and R&D spending not to be a lot higher and not to be a lot lower. We're going to continue to maintain those levels, but the mix shift and the volume is going to help make the profitability much more pronounced in the fourth quarter in that regard.

Speaker #4: So, the overall volume in Q4 is higher, number one. Number two, the mix keeps getting more favorable in Q4. From Q1 to Q2 to Q3 and Q4.

Speaker #4: So, that's also a positive trend that's affecting Q4. We expect SG&A and R&D spending not to be a lot higher and not to be a lot lower.

Speaker #4: We're going to continue to maintain those levels, but the mixed shift in the volume is going to help make the profitability much more pronounced in Q4.

We're going to continue to maintain those levels, but the mix shift and the volume is going to help make the profitability much more pronounced in the fourth quarter in that regard. Now, in terms of the overall outlook, we've provided the full year numbers on profitability, and we're confident that we're going to be able to achieve that.

Speaker #4: In that regard, now, in terms of the overall outlook, we've provided the full-year numbers on profitability, and we're confident that we're going to be able to achieve.

Wahid Nawabi: Now, in terms of the overall outlook, we've provided the full year numbers on profitability, and we're confident that we're going to be able to achieve that. Yeah. And I gave color in my script on SG&A, R&D, and margins for the year. So that's really how you get there. It really comes from improved gross margins and some leverage on things like SG&A, partly because we realize some of the synergies that we've established in the first half but don't really realize the second half of the year. And in terms of capacity, those numbers really represent where we're at in terms of capacity, where we are increasing incrementally in many places in the second half or even today, and those are reflected in the numbers. Got it. And just to clarify, is it fair to assume that your free cash will break even this year?

Speaker #4: That. Yeah, and I gave color in my...

Wahid Nawabi: Yeah. And I gave color in my script on SG&A, R&D, and margins for the year. So that's really how you get there. It really comes from improved gross margins and some leverage on things like SG&A, partly because we realize some of the synergies that we've established in the first half but don't really realize the second half of the year. And in terms of capacity, those numbers really represent where we're at in terms of capacity, where we are increasing incrementally in many places in the second half or even today, and those are reflected in the numbers.

Speaker #3: script on SG&A and R&D and margins for the year. So that's really how you get there. It really comes from improved gross margins and some leverage on things like SG&A, partly because we get realized some of the synergies that we've established in the first half, but don't really realize the second half of the year.

Speaker #3: So, in terms of capacity, those numbers really represent where we're at in terms of capacity, where we are increasing incrementally in many places in the second half, or even today, and those reflected in the numbers.

Colin Canfield: Got it. And just to clarify, is it fair to assume that your free cash will break even this year?

Speaker #6: Got it. And just to clarify, is it fair to assume that your free cash flow break-even this year?

Speaker #3: Well, we're looking for 50%. It depends on how you define all that, but we're looking at 50% cash conversion to.

Wahid Nawabi: Well, we're looking for 50%. It depends how you define all that, but we're looking at 50% cash conversion to our EBITDA. For the year? For the year. Okay. Which is a significant improvement over last year. Yeah, which is a big improvement. So basically, that's EBITDA less our CapEx, less our working capital change from EBITDA. One moment for our next question, please. It comes from Peter Arment with Baird. Please proceed. Yeah. Good afternoon, Wahid and Kevin. Hey, Peter. Hi, Peter. Hey, Wahid. Maybe we'll just touch upon the cash comment that you guys just talked about. Your Precision Strike kind of product revenues are up 68% for the first six months of this year, but Unbilled continues to grow. And I thought we were under a new contract or payments schedule. Could you maybe give us a little more color what's going on there? Yeah.

Kevin McDonnell: Well, we're looking for 50%. It depends how you define all that, but we're looking at 50% cash conversion to our EBITDA.

Wahid Nawabi: For the year.

Speaker #4: For the year?

Speaker #3: For the year.

Kevin McDonnell: For the year.

Colin Canfield: Okay.

Wahid Nawabi: Which is a significant improvement over last year.

Speaker #6: Okay. This is a significant improvement over last year.

Speaker #3: Yeah, which is a big improvement. So basically, that's EBITDA less our CapEx less our working capital change from EBITDA.

Kevin McDonnell: Yeah, which is a big improvement. So basically, that's EBITDA less our CapEx, less our working capital change from EBITDA.

Operator: One moment for our next question, please. It comes from Peter Arment with Baird. Please proceed.

Speaker #1: One moment for our next question, please. It comes from Peter Arment with Baird.

Speaker #1: proceed. Yeah, good

Peter Arment: Yeah. Good afternoon, Wahid and Kevin. Hey, Peter. Hi, Peter. Hey, Wahid. Maybe we'll just touch upon the cash comment that you guys just talked about. Your Precision Strike kind of product revenues are up 68% for the first six months of this year, but Unbilled continues to grow. And I thought we were under a new contract or payments schedule. Could you maybe give us a little more color what's going on there?

Speaker #5: afternoon, Wahid and Kevin.

Speaker #3: Hey, Peter. Hi, Peter.

Speaker #5: Hey, Wahid, could you maybe touch upon the cash comment that you guys just talked about? Your precision strike product revenues are up 68% for the first six months of this year, but unbilled continues to grow.

Speaker #5: And I thought we were under a new contract or payments schedule. Could you maybe give us a little more color on what's going on?

Speaker #5: there? Yeah, I

Kevin McDonnell: Yeah. I mean, as we've talked in many quarters, there's been a whole transition period there. There's been some changes in our contracting office, our contracting personnel that have all been positive. And at this point, we feel like we have a clear runway to start bringing that down the second half of this year. And plus, we have this; we do, as we mentioned in the script, the amount of unbilled business is significant, particularly with the service businesses.

Speaker #3: Mean, as we've talked in many quarters, there's been a whole transition period there. There have been some changes in our contracting office and our contracting personnel that have all been positive.

Wahid Nawabi: I mean, as we've talked in many quarters, there's been a whole transition period there. There's been some changes in our contracting office, our contracting personnel that have all been positive. And at this point, we feel like we have a clear runway to start bringing that down the second half of this year. And plus, we have this; we do, as we mentioned in the script, the amount of unbilled business is significant, particularly with the service businesses. And the revenue over time portion of our overall revenue is also increasing, primarily because of BlueHalo. And so that also is playing a factor in this equation, Peter.

Speaker #3: And at this point, we feel like we have a clear runway to continue to start bringing that down in the second half of this year.

Speaker #3: And plus, as we mentioned in the script, the amount of unbilled business is significant, particularly with the service businesses.

Wahid Nawabi: And the revenue over time portion of our overall revenue is also increasing, primarily because of BlueHalo. And so that also is playing a factor in this equation, Peter. Just one other comment to make on this topic is that we're really more focused on the top-line growth and making sure that we capture the opportunities, and not lose momentum on the significant upside that we have in our long-term plan. So we're really optimizing to make sure that we deliver for our customers, we deliver capabilities, develop the products.

Speaker #4: Over time, the portion of our revenue is increasing overall. Primarily because of the blue halo, and so that is also playing a factor in this equation, Peter.

Speaker #4: But just one other comment to make on this topic is that we're really more focused on the top-line growth and making sure that we capture the opportunities and not lose momentum on the significant upside that we have in our long-term plan.

Wahid Nawabi: Just one other comment to make on this topic is that we're really more focused on the top-line growth and making sure that we capture the opportunities, and not lose momentum on the significant upside that we have in our long-term plan. So we're really optimizing to make sure that we deliver for our customers, we deliver capabilities, develop the products. We're anticipating a lot more task orders in the second half of the year. So we have to really start building products in advance. We can't wait until the last moment. While we're taking not all the risk, but we are taking some calculated risk to position ourselves to deliver for our customers because we know that they need these systems very desperately. Okay.

Speaker #4: Sure that we deliver for our customers, so we're really optimizing to make. We deliver capabilities, develop the products. We're anticipating a lot more task orders in the second half of the year.

We're anticipating a lot more task orders in the second half of the year. So we have to really start building products in advance. We can't wait until the last moment. While we're taking not all the risk, but we are taking some calculated risk to position ourselves to deliver for our customers because we know that they need these systems very desperately.

Speaker #4: And so we have to really start building products in advance. We can't wait until the last moment. And while we're taking not all the risks, but we are taking some calculated risks to position ourselves to deliver for our customers, because we know that they need these systems very.

Speaker #4: Desperately. Okay, so just to be...

Peter Arment: Okay. So just to be clear, you expect Unbilled to be probably materially lower as we get through the fourth quarter, just given your comments about cash conversion on EBITDA?

Wahid Nawabi: So just to be clear, you expect Unbilled to be probably materially lower as we get through the fourth quarter, just given your comments about cash conversion on EBITDA? Right. It's pretty simple. We have the $300 to 320 million of EBITDA range. CapEx should be roughly a little bit less than half of that. So in order to hit 50% cash conversion on EBITDA, the change in working capital has to be minimal. And that's what we're forecasting. Got it. I'll jump back to you. Thanks, guys. Thank you, Pete. Thank you so much. And as a reminder, if you do have a question, press star 11 to get in the queue. The question comes from Austin Bollig with Needham. Please proceed. Hey, guys. Thanks for taking the question, and congrats on the nice order flow through even with the government shutdown.

Speaker #5: Clear, you expect unbilled to be probably materially lower once we get through the fourth quarter, just given your comments about cash conversion on EBITDA?

Kevin McDonnell: Right. It's pretty simple. We have the $300 to 320 million of EBITDA range. CapEx should be roughly a little bit less than half of that. So in order to hit 50% cash conversion on EBITDA, the change in working capital has to be minimal. And that's what we're forecasting.

Speaker #3: Right, it's pretty simple. We have the $300 million to $320 million EBITDA range. CapEx should be roughly a little bit less than half of that.

Speaker #3: So, in order to hit 50% cash conversion on EBITDA, the change in working capital has to be minimal. And that's what we're.

Peter Arment: Got it. I'll jump back to queue. Thanks, guys.

Speaker #5: Got it. I'll jump back to you. Thanks.

Wahid Nawabi: Thank you, Pete.

Speaker #4: Thank you,

Speaker #4: Pete. Thank you so much.

Operator: Thank you so much. And as a reminder, if you do have a question, press star one one to get in the queue. The question comes from Austin Bollig with Needham. Please proceed.

Speaker #1: Reminder, if you do have a question, guys, press star 11 to get in the queue. The question comes from Austin Bolig with Needham.

Speaker #1: Please

Speaker #1: proceed. Hey, guys.

Austin Bohlig: Hey, guys. Thanks for taking the question, and congrats on the nice order flow through even with the government shutdown. But my question has to do with kind of the full-year guidance and with this anticipated funding coming from the OBB. Is it fair to assume that anything that flows through that you're expecting is not yet baked into your current full-year guidance?

Speaker #6: Thanks for taking the question and congrats on the nice order fall through, even with the government shutdown. But my question has to do with kind of the full year guide and with this anticipated funding coming from the OBB.

Wahid Nawabi: But my question has to do with kind of the full-year guidance and with this anticipated funding coming from the OBB. Is it fair to assume that anything that flows through that you're expecting is not yet baked into your current full-year guidance? No, Austin. We are expecting, and we're expecting multiple task orders and orders in the second half that we believe we're going to be able to convert that to revenue. In order for us to overperform, it's going to be more difficult because of the timing, how long it takes to go build those products, get them tested and accepted by the customer, and then deliver to our customers. So we're confident about our full-year guidance, number one. Number two, we do expect contract awards and task orders in the second half that will convert to revenue, and that's part of our forecast.

Speaker #6: Is it fair to assume that anything that flows through that you're expecting is not yet baked into your current full year?

Speaker #6: guidance? No,

Wahid Nawabi: No, Austin. We are expecting, and we're expecting multiple task orders and orders in the second half that we believe we're going to be able to convert that to revenue. In order for us to overperform, it's going to be more difficult because of the timing, how long it takes to go build those products, get them tested and accepted by the customer, and then deliver to our customers. So we're confident about our full-year guidance, number one. Number two, we do expect contract awards and task orders in the second half that will convert to revenue, and that's part of our forecast.And we're confident that we can achieve that.

Speaker #4: Austin, we are expecting multiple task orders and orders in the second half that we believe we're going to be able to convert to revenue.

Speaker #4: In order for us to overperform, it's going to be more difficult because of the timing, how long it takes to go build those products, get them tested and accepted by the customer, and then deliver to our customers.

Speaker #4: So we're confident about our full-year guidance, number one. Number two, we do expect contract awards and task orders in the second half that will convert to revenue, and that's part of our forecast.

Speaker #4: And we're confident that we can achieve that.

Wahid Nawabi: And we're confident that we can achieve that. Gotcha. Gotcha. And then just kind of some specifics on kind of where are you hoping that these new contracts come from within your product portfolio? Is this Precision Strike, UAS, Counter UAS? So, Austin, it's a very nice, nice portfolio or basket of contracts and awards that we expect. It's basically the critical areas that the DoD needs them desperately, and we've been talking about. So P550, more Switchblade, more one-way attack, more Counter UAS, more directed energy, more SCAR and Badgers. And those are the key areas that we expect more of in our second half of the year. There's obviously orders for cyber and other businesses too, but those five or six categories make up the lion's share of the expected additional contract awards and task orders for the second half. All right.

Austin Bohlig: Gotcha. Gotcha. And then just kind of some specifics on kind of where are you hoping that these new contracts come from within your product portfolio? Is this Precision Strike, UAS, Counter UAS?

Speaker #6: Gotcha, gotcha. And then, just kind of some specifics on where you are hoping that these new contracts come from within your product portfolio?

Speaker #6: Is this precision strike, UAS, counter?

Speaker #6: UAS? So Austin, it's a

Wahid Nawabi: So, Austin, it's a very nice, nice portfolio or basket of contracts and awards that we expect. It's basically the critical areas that the DoD needs them desperately, and we've been talking about. So P550, more Switchblade, more one-way attack, more Counter UAS, more directed energy, more SCAR and Badgers. And those are the key areas that we expect more of in our second half of the year. There's obviously orders for cyber and other businesses too, but those five or six categories make up the lion's share of the expected additional contract awards and task orders for the second half.

Speaker #4: Very nice. We have a nice portfolio or basket of contracts and awards that we expect. It's basically the critical areas that the USDOD needs desperately, and we've been talking about.

Speaker #4: So, P550, more switchblade, more one-way attack, more counter UAS, more directed energy, more SCAR and Badgers, and those are the key areas that we expect more of in our second half of the year.

Speaker #4: There are obviously orders for cyber and other businesses too, but those five or six categories make up the lion's share of the expected additional contract awards and task orders for the second.

Speaker #4: half. All right.

Austin Bohlig: All right. Well, thank you, guys, for taking my question.

Speaker #6: Well, thank you, guys, for taking my question.

Wahid Nawabi: Well, thank you, guys, for taking my question. You're welcome, Austin. Thank you so much. Our next question comes from the line of Clark Jeffries with Piper Sandler. Please proceed. Hello. Thank you for taking the question. I wanted to ask, Wahid, how did the recent changes to missile technology control and the treatment of UAS affect the current air environment portfolio and maybe even how your posture might change for the future product portfolio? Did any of those changes have any direct impact on the $870 million IDIQ? Sounds like maybe there was some counter-UAS focus to that contract, but curious there. And then any other key policy changes you'd flag as crucial for growing the international business? Thank you. Sure. So we expect, first of all, the comment about the change in policy, absolutely.

Wahid Nawabi: You're welcome, Austin.

Speaker #4: You're welcome. Austin.

Operator: Thank you so much. Our next question comes from the line of Clark Jeffries with Piper Sandler. Please proceed.

Speaker #1: Thank you so much. Our next question comes from the line of Clark Jeffries with Piper Sandler. Please.

Speaker #1: proceed. Hello.

Clarke Jeffries: Hello. Thank you for taking the question. I wanted to ask, Wahid, how did the recent changes to missile technology control and the treatment of UAS affect the current air environment portfolio and maybe even how your posture might change for the future product portfolio? Did any of those changes have any direct impact on the $870 million IDIQ? Sounds like maybe there was some counter-UAS focus to that contract, but curious there. And then any other key policy changes you'd flag as crucial for growing the international business? Thank you.

Speaker #7: Thank you for taking the question. I wanted to ask Wahid how the recent changes to missile technology control and the treatment of UAS affected the current air environment portfolio?

Speaker #7: And maybe even how your posture might change for the future product portfolio? Did any of those changes have any direct impact on the $870 million IDIQ?

Speaker #7: Sounds like maybe there was some counter-UAS focus to that contract, but curious there. And then any other key policy changes you'd flag as crucial for growing the international business?

Speaker #7: Thank you.

Wahid Nawabi: Sure. So we expect, first of all, the comment about the change in policy, absolutely. We believe that the new policy and definition that the US Department of War and Government came up with, how they categorize drones and how they categorize loading munitions and one-way attack, is very favorable to us because they're trying to lax the definitions as to how it's treated versus a true missile that goes very long, long distances and is categorized as a missile. So an armed drone or an FPV even is not categorized the same. That is going to help us significantly over the next two to three years. It's not really immediate, but it is over the next two to three years.

Speaker #4: Sure.

Speaker #4: So we expect, first of all, the comment about the change in policy, absolutely. We believe that the new policy and definition that the U.S. Department of War and Government came up with, regarding how they categorize drones and how they categorize loading munitions and one-way attack, is very favorable to us because they're trying to relax the definitions as to how it's treated versus a true missile.

Wahid Nawabi: We believe that the new policy and definition that the US Department of War and Government came up with, how they categorize drones and how they categorize loading munitions and one-way attack, is very favorable to us because they're trying to lax the definitions as to how it's treated versus a true missile that goes very long, long distances and is categorized as a missile. So an armed drone or an FPV even is not categorized the same. That is going to help us significantly over the next two to three years. It's not really immediate, but it is over the next two to three years. Secondly, yes, the sole source, nearly $900 million IDIQ is directly related to that because the DoD and the Department of War expects us to ship a lot of products because of the demand that they see from different allies.

Speaker #4: That goes very long, long distances, and it's categorized as a missile. So an armed drone or an FPV even is not categorized the same.

Speaker #4: That is going to help us significantly over the next two to three years. It's not really immediate, but it is over the next two to three years.

Secondly, yes, the sole source, nearly $900 million IDIQ is directly related to that because the US DoD and the Department of War expects us to ship a lot of products because of the demand that they see from different allies. Obviously, the US Department of Defense is in contact with those international customers, and they see the uptick in demand for our solutions. So we do expect that to happen, but most of that is not going to happen overnight. It's still a process. It takes some time, and we work it. Overall, we feel very positive about the general demand for our solutions from international markets, including directed energy, counter-UAS, one-way attack, loitering munition, P550, Jump 20.

Speaker #4: Secondly, yes, the sole-source nearly $900 million IDIQ is directly related to that because the USDOD and the Department of War expect us to ship a lot of products due to the demand they see from different allies.

Speaker #4: Obviously, the U.S. Department of War is in contact with those international customers, and they see the uptake in demand for our solutions. So we do expect that to happen.

Wahid Nawabi: Obviously, the US Department of Defense is in contact with those international customers, and they see the uptick in demand for our solutions. So we do expect that to happen, but most of that is not going to happen overnight. It's still a process. It takes some time, and we work it. Overall, we feel very positive about the general demand for our solutions from international markets, including directed energy, counter-UAS, one-way attack, loitering munition, P550, Jump 20. Thank you very much. You're welcome. Thank you. This concludes the Q&A session. I will turn it back to Denise for final comments. Thank you once again for joining today's conference call and for your interest in AeroVironment. As a reminder, an archived version of this call, SEC filings, and relevant news can be found under the investor section of our website.

Speaker #4: But most of that is not going to happen overnight. It's still a process. It takes some time, and we work at it. Overall, we feel very positive about the general demand for our solutions in international markets.

Speaker #4: Including direct energy, counter UAS, one-way attack, loading munition, P550, JUMP.

Speaker #4: Including direct energy, counter UAS, one-way attack, loading munition, P550, and JUMP 20. Thank you very much.

Clarke Jeffries: Thank you very much.

Speaker #7: much.

Wahid Nawabi: You're welcome.

Speaker #4: welcome.

Operator: Thank you. This concludes the Q&A session. I will turn it back to Denise for final comments.

Speaker #1: Thank you. And this concludes the Q&A session. I will turn it back to Denise for final.

Speaker #1: Thank you once again for joining.

Denise Pacioni: Thank you once again for joining today's conference call and for your interest in AeroVironment. As a reminder, an archived version of this call, SEC filings, and relevant news can be found under the investor section of our website. We hope you enjoy the rest of your evening, and we look forward to speaking with you again following next quarter's results.

Speaker #8: Today’s conference call is for your interest in Air Environment. As a reminder, an archived version of this call, along with filings and relevant news, can be found under the Investor section of our website.

Speaker #8: We hope you enjoy the rest of your evening, and we look forward to speaking with you again following next quarter's results.

Wahid Nawabi: We hope you enjoy the rest of your evening, and we look forward to speaking with you again following next quarter's results. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Q2 2026 AeroVironment Inc Earnings Call

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