AeroVironment, Inc. Aktie

Good afternoon, everyone. My name is Sheila Kahyaoglu with the Jefferies Aerospace, Defense & Airlines Equity Research team. Thanks so much for joining us for our AeroVironment fireside chat with Wahid Nawabi, who's Chairman and CEO; and Sean Woodward, EVP and CFO. Thank you both for being here, especially in light of your stock being up 10% this morning on solid results. So always a much easier fireside chat when results are good.

Hope this every day.

There you go.

Little cooler.

There you go. So upside from here only. Great results on fiscal Q1 from a revenue and EBITDA perspective beating, but maintaining your fiscal '27 guidance. How do we think about the puts and takes in all that?

Thank you, Sheila. Thank you, Jefferies, for having us. Obviously, we had a fantastic quarter, not even a good quarter, but a fantastic quarter. There's 3 main areas that we're focused on, making sure that what we expected in terms of our plans that we deliver financially, which we did, and we met or exceeded pretty much almost all of our metrics financially.

The second one was to make sure that we make strategic progress on the milestones that takes the company to the long-term plans that we unveiled in June, which has a pretty solid aggressive -- not aggressive, but realistic organic growth, both in terms of top and bottom lines.

And then third was also that we're really scaling a whole bunch of different products and franchises to get ready for significant growth over the next 4, 5 years because we're at an inflection point in expanding capacity in several of our facilities, and I think we achieved those goals and surpassed some of those goals based on our own plans as well.

So overall, a great quarter. We're in a very, very good position. I say this not lightly, but very seriously that 1.5 decades time that Sean and I have been with the company, the prospects for growth and value creation has never been better. We've got lots and lots of momentum behind us. We're in the right categories. Regardless of what happens to the budgets within the U.S. DOW or internationally, we're in the right categories with the right solutions that's been battle tested, validated, and we've got the production capacity, and we're scaling and we can deliver now and they're very affordable. Those 4, 5 ingredients is ideal scenario for growth and focus for the department and our allies.

That's great to hear. And one of the other things is your recent awards have increased your revenue visibility to 86% of the full year guidance. How do we think about what remains unbooked and execution dependent for the '27 guide?

Sure. Yes, 86% quarter 1 visibility is a fantastic start to the year. Last year, looking at our visibility at the same time, we were at 82%. We ended the year pretty strong last year. In the prior year, we're at 80% visibility. So sitting at 86% gives us very strong confidence that we're going to be able to execute to our fiscal targets that we have.

In terms of the remaining 14%, we have multiple different opportunities that we're tracking pretty much across our portfolio. There's multiple different opportunities coming through that we are tracking closely, and obviously, we'll announce and provide that information as additional awards come through.

Great. And the cadence still calls for about 45% of revenue and 1/3 of EBITDA in the first half. Can you maybe unpack some of the Q2 EBITDA drivers, EBIT margin drivers and specific mix and volume impacts there?

Sure. Yes, you're right. We continued with our 45-55 revenue split first half, second half, and 1/3, 2/3 on the EBITDA. We see the second half of the year really being driven by higher sales volume, a little bit more favorable sales mix. Some of these key awards that we just announced, including the E-HEL award and an international directed energy award.

Those will ramp up from a revenue standpoint in the second half of the year, which has a little bit better margin profile than we've had in that segment, too, in the SCDE segment. So we should see some improvements in the second half of the year, driving the EBITDA, the 2/3 in the second half of the year.

In terms of the second quarter, we're still maintaining a 45% revenue for the first half of the year and 1/3 on the EBITDA. A little bit of a sales mix and some ramp-up of new products coming to the market, which will have a little bit of pressure on our EBITDA and some increased investments that we continue to plan to make this fiscal year will align to those targets.

Can we maybe talk about -- can we maybe discuss bridge investors from the backlog to the broader opportunity set? How do we think about what the opportunity set looks like remaining across Switchblade, FMS and Titan capacity?

Sure. So in terms of additional orders and backlog conversion?

Yes.

So we have $1.5 billion of funded backlog. That's going to convert -- 86% is going to convert this year. We're going to bring that into next year as well. Additional orders that we're tracking are going to convert to the second half of the year revenues. We've gotten some key awards on Titan. We announced an $80 million delivery order on a -- got $500 million contract award for the domestic Shield program. Those are going to convert to revenue this fiscal year. They're in our guide.

And E-HEL and the international LOCUST are also part of our guide this year and will convert to revenue, partially this year and that's going to continue on for the foreseeable future in the next few years.

And just on Switchblade, the Army IDIQ for $990 million, while the international vehicle has not yet been utilized. How do we think about key milestones on the international vehicle and potential for any additional Army add-ons?

Yes. So we just announced a delivery order, I think it was 12 for the Army, $51 million that we got just in the last quarter or so. So that's continued demand that we're seeing on the $990 million contract. We still have some room remaining on that contract vehicle to support additional direct requirements for the loitering munitions.

And we have multiple different FMS cases as well as direct commercial sale cases for our Switchblade product in the pipeline, all tracking as scheduled and hopefully be awarded this year. And of course, we'll announce those as soon as we can. So multiple different FMS cases are working their way through the system.

Great. I guess just one more as I think about the demand and backlog outlook, book-to-bill was 1.5. How should we think about just the lumpiness going forward? That's always been a watch area for investors and the sustainability of the demand. But I think maybe if you could talk about the demand metrics, too, across directed energy, counter UAS and loitering munitions.

Yes. So we had a great book-to-bill of 1.4 in quarter 1, and our last 12 months are at 1.5, which is fantastic. It is lumpy. The business doesn't always have a steady order flows. There's certain quarters that are better than others. We're very happy with our first quarter at the 1.4 book-to-bill ratio. We'd love to continue with that, but we know the business, there is some lumpiness in the cycles. There's been a lot of pent-up demand, a lot of dollars that we were waiting to be allocated from the FY '26 budgets.

We've been seeing that go through. We thought that was going to happen on the last call. We thought the summer was going to increase order activity, and we saw that play out as the orders were coming through our quarter 1 as well as into the first quarter -- or second quarter that we've announced so far.

Can you maybe talk about LOCUST production and firm fixed price there? Maybe backing up, how do you think about LOCUST demand overall? And I know you discussed it in the June Analyst Day. And how do we think about the revenue contribution this year?

Sure. So LOCUST went from 7 years ago, beginning the development, handfuls of systems have been built over those 7 years, demonstrated on ships, on land at the southern border, in war zones. It's proven its capability. But it's been a very low rate volume build so far. We are now investing in our New Mexico facility in Albuquerque, where we're putting $30 million to build out that production facility to scale the directed energy. That's going to allow us to execute on the E-HEL program. It's going to allow us to execute on the international award that we received as well as additional volume.

That E-HEL program is going to be over a multiple year window. It's roughly a 4-year program. We expect demand both domestically as well as internationally to increase for the LOCUS product as the Army has put that seal of approval that they've awarded it to us. So we're building up the capacity to far greater than the current volume, up to roughly $0.5 billion a year type of volume for the LOCUST directed energy.

And as you think about LOCUS, the $500 million of annual franchise opportunity, how do you think about the competitive landscape there and potential other service sales? Would it only be the Army? How you could think about that?

So I mean, this particular win, coupled with the international win, I believe it's an inflection point for this business, for this product line. If you go back 5-plus years ago when the Ukraine conflict started, loading munitions and one-way attack drones was -- nobody expected it to be or generally speaking, in the public and investor community and in the militaries, how big of a role it's going to have in the war.

And that has changed the paradigm, and that's why it's close to a $0.75 billion business for us fast forward 5 years from now -- from then. I believe that the LOCUST directed energy solution is in a similar inflection point with possibly a bigger market opportunity globally over the next 5 to 10 years.

The U.S. military has been chasing and investing in directed energy systems for over 30-plus years, 3-plus decades. And no one's been able to actually solve the problem reliably and effectively with a solution that's affordable, that's practical, that's resilient, that's also with high level of reliability and availability. We've done that. Our system is in the fight, as Sean mentioned earlier, in different theaters around the world, including the southern border.

And the Army has been convinced now, and that's why they awarded us this $0.5 billion, the largest production contract for laser weapon systems in the history of the department. And so I believe that these 2 awards is going to start the knee in the curve where more and more services are going to look at procuring these things, protecting sites. We're very vulnerable in a lot of different ships that it's in the central command in the Middle East as well as in Asia Pacific.

And then the economics of the current solution set doesn't work out. Every time Iran, for example, fires a $150,000 Shahed, we use $1 million to $10 million missile to defeat one. We just don't have the battery, the depth of magazine or the economics to be able to sustain that kind of a conflict if it were to go further with a larger adversary.

So directed energy is really the holy grail when it comes to that type of a defensive mechanism. And this solution is developed for the U.S. Army, the E-HEL program and X2 -- X3 LOCUST to address Group 1, 2 and 3 drones effectively. And as you said, it's mobile systems. It can go on ships, it could go on land, stationary. And it takes the cost equation to less than $10 a shot, from millions of dollars a shot to less than $10 a shot.

And the second thing is it gives you as long as you have electricity, it gives you unlimited magazine. It means you can keep shooting this. So adversaries will lose that equation or that challenge if they were to compete with drones and little drones with a LOCUST system. That's why I believe that the application for this is massive. And we're the first company that's done that. That's why we're scaling manufacturing.

Historically, of any of our product franchises, when we get a very strong validated acceptance with the U.S. Army or U.S. military, followed by especially an international award, the franchise adoption rate just takes off. It's happened to us half a dozen times in our history. Raven, Puma, P550 now, JUMP 20, Switchblade 300, Switchblade 600. This is something that we know how to do. We've done it several times in our history.

So I feel very confident that fast forward this scenario a few years from now, it could be as big as a $0.5 billion to $1 billion-plus business for AV. And it's also -- we're designing -- we've designed the product to be a commercially viable product. So we sell it as a firm fixed price commercial product. That's why we were able to actually successfully get a DCS sale, the direct commercial sale with international ally.

That also is the first time in the history of the Department of War in the United States, where U.S. has allowed a supplier like us, anybody to sell and export a laser weapon system for military applications to a foreign country. It has never happened in the history of the department. So I think these are significant milestones in the overall trend of aggressive adoption over the next several years.

I have a few follow-up questions, if that's okay. Can you talk about LOCUST X3? What -- so as an Army platform, it sits on top of an armored vehicle. How could you expand it to potentially other services? And what differentiates it versus its competitors?

So there's lots of differentiators in our solution versus everyone else. There's lots of people that are chasing this. We really -- a few things that's really important. Number one, we focused on the sweet spot of the market. A lot of players are going after much higher kilowatt power. That's like giving somebody bigger and more powerful bullets, but they don't know how to aim at the target. So giving somebody more bullets or bigger bullets does not really solve the problem if somebody is spraying the shots everywhere if I were to use an analogy.

The secret sauce to our system is that we are able to perfect the ability for a moving vehicle, such as a Humvee or a Stryker vehicle, armored vehicle to be able to go in an uneven pavement at around 20, 30 kilometers per hour, detect 365 -- 360 degrees around it, just real time, any type of drone from Group 1 to 3 and then aim at it and then basically zap it down within 3 to 5 seconds and do that every few minutes as you reload and you recharge.

That tracking, targeting and control hardware and software algorithm is something that we've been perfecting for a lot of lots of years. Now this base gives us the ability to expand the product line also at higher kilowatts and at lower kilowatts for a variety of other applications. In addition to that, the way X3 is designed, not only can you detect while you're on the move, you can also hit and defeat drones while you're on the move. That makes it incredibly compelling and powerful. It means you don't have to stop to do that action of actually hitting the drone.

And lastly, we have done many tests with our customers, including the U.S. Navy, onboard aircraft carriers, ships, where they have given us -- the latest one was we were given 17 real targets on a real mission with the U.S. Navy on a ship, George H.W. Bush, I believe, in Norfolk, where they give us 17 different type of real targets, and our system hit 17 out of 17. 100% success rate. And so far, the success rate of this product in the field in terms of its availability also is very high. It's -- there are very few systems in operation, and our customers just keep moving them around because it's in such high demand.

Last piece of data. Department of Homeland Security and Customs and Border Patrol has developed -- deployed some of these systems in the southern border. They just published some stats on this that the success of LOCUST has been so phenomenal that the drug cartel drone traffic over the southern border has decreased by 70% plus, 70% plus. And it just shows the power of this type of a solution set and the technology that it has.

And so we're really focused on this. It's not the only one. We're very fortunate because we have a half a dozen of these growth opportunities in our portfolio. But I think LOCUST is going to be very unique because we are -- we've got a solution set that has a moat. It's very effective, and our customers have already pushed the I believe button. And we're scaling production, and we can deliver them at scale today.

And as you think about the international expansion, you mentioned that these franchise programs tend to come in waves. And once you get one under the belt, more will go forward. How are you thinking about this international opportunity being tested in the time line of potential other orders?

Yes. So I mean, historically, when we get adoption with the U.S. military and the U.S. government allows us to export and sell them to allies, the momentum picks up very quickly because, look, the world is not a safe place. Think of all the different theaters around the world, the Middle East, Strait of Hormuz, Eastern Europe, Mediterranean, Black Sea, Mediterranean Sea, Asia Pacific, lots of these places -- Gulf of America, Latin America, there's lots of places where systems like this could be dramatically effective and helpful to the needs of our customers.

And so once the government gives them the nod that this is validated, and "I believe" button's pushed, I mean, we're in multiple active shooting wars around the world, and it's not a safe place, right? And you see drone attacks in places like the Middle East where Iran fires 1,000-plus of these drones in a week. And basically, this just drives havoc into many countries' economies, let alone the global markets.

So it's not a small little deal that we're talking about. This is something that is going to be very seriously, I believe, observed and most likely adoption is going to take off after that. It doesn't happen overnight because the acquisition process still takes time. It is a military sale. It does have to go through the governments, and we still have to ramp up production because the lead times on some of the materials are still very long. It's a very new market. But we know how to do this. We've done it several times in our history, and we're executing on our plan.

No, that's super helpful color. Maybe I'll ask 2 more on international and focus on your other products from here. You mentioned it's still a process to sell internationally. How does the export agency approvals help you? And how are you thinking about localized efforts as well?

Sure. So another thing that's very unique about AV is that our success and track record of being able to sell and successfully export products from the United States and our technologies internationally is phenomenal. We export to 55 different countries around the world and pretty much every continent except Antarctica. And so we are very successful in knowing how to do that. We've been growing that before.

And before the BlueHalo acquisition, international revenue represented at various times between 40% to 50% of the total company revenue. I believe that the international markets adoption and revenue is going to grow even faster because there's tremendous need for our systems out there. We're actively engaged in several countries in those 3 markets. The key markets that we're focused on is Europe, Middle East and Asia Pacific.

We have announced several joint ventures, subsidiaries, teaming agreements, partnerships in multiple countries. And I think that, that's going to continue to grow. In terms of local content versus not, some of these countries have such great needs, and there's so much demand for our systems that it's going to require some local content. We have a very sound strategy around that. We know exactly how to do that without compromising our IP, without compromising our value proposition and the business model.

And we know how to work with the U.S. government and how to set these things up. We've done it many times in our past, and that's a strength of AV in my view, in general.

That's super helpful. Can we talk about Titan as well, the $500 million IDIQ, just to touch upon that again and the initial $80 million order under domestic Shield tied to Golden Dome. How do we think about that converting to revenues and further milestones?

Sure. So let me just touch on our overall strategy on Counter-UAS. Counter-UAS to us is not just a product. Counter-UAS is a problem and it's a category that is going to continue to grow over the next 5, 10 years. We never thought that you're going to have a one solution fits-all strategy for this market.

Our strategy, which is unique compared to almost all of our competitors, is to have a layered defense solution set that addresses Counter-UAS and multiple different types of capabilities. The first layer of that defense against UAS is RF jamming. We've got one of the world's best RF jamming systems in the world. Titan series is proven. It's worked in Ukraine. It's worked in the U.S., it's worked internationally. We're doubling revenue every year in the last couple of years alone, and it's going to continue to grow.

And the example you just described, the order from the drone Shield program or the Shield and the Golden Dome initiative is roughly about $0.5 billion total contract award sole-sourced to AV, so we can actually build more of these and deliver them to the U.S. military. We're going to deliver those things or portion of that $80 million, a significant portion of it this year. We're already actively ramping production. It's one of the product lines out of 7 different ones that we're scaling production aggressively.

The second layer of our defense, just to go back to the Counter-UAS, is the directed energy solution. So if the RF jamming fails, which most likely in the future, as drones become more autonomous and independent of GPS and RF communication, then RF jamming doesn't work. So then you have to go to the second layer of defense, which is direct energy. Directed energy is the technology that's going to become probably the lion's share of the use cases in the market for military applications. And you heard my story earlier as to what we're doing there and why we're the leader.

If those two layers fail, the last resort is to use a kinetic missile. In the entire arsenal of the U.S. military's missiles, there is not a missile that is designed from the ground up that can address a Group 1, 2, 3 drone cost effectively. Today, as I said, we use $1 million to $10 million missiles to shoot down $150,000 Shahed drone. That economically is not feasible. We have been awarded a contract. We competed with RTX on this, called LRKI, Long-Range Kinetic Intercept. It's a U.S. Army program to develop a next-generation Counter-UAS missile, specifically at cost targets that changes that equation, make it at parity economically feasible to do that.

We're ramping up our Huntsville facility, specifically to scale that site. The U.S. Congress actually put more money and awarded us more funding to accelerate the production and transition to full rate production. And we're aggressively building those units going through the safety confirmation and testing and maturity of that product to get it to a production level in the next 12 to 18 months.

So as you can see, our strategy is not a one solution fits all or solve part of the problem. We believe that the Counter-UAS market is a multibillion dollar global market. We've got the leading solutions in all 3 categories. And I think over the next several years, we're going to continue to scale this and benefit from that growth as well.

As always, super helpful to provide the macro perspective, and I think we all appreciate it, especially myself. So on UAS, the revenues have been growing quite significantly. How do we think about the run rate going forward and sequential growth in that business?

Yes. So the first quarter UAS revenue was up 71% year-over-year. So we'd love to continue that trend going forward at that level of rate. We've had some key wins. We won in the first quarter a $117 million P550, our Group II solution for the long-range reconnaissance program with the U.S. Army. That award is beginning its deliveries now and had it in Q1. It's going to continue in Q2 and it will be included in our full year numbers.

Overall, UAS is continuing to grow. We're seeing tremendous adoption of our JUMP 20 and our JUMP 20-X, our Group 3 solutions in that space, both domestically and internationally. We've won multiple different programs internationally with our JUMP 20. We've recently got a military designation for it by the Italian government, putting it into their inventory as a defined inventory item. That's a really key milestone to win and improve the airworthiness and the overall capability of that platform.

So our UAS platforms -- continued with Puma as well. And Puma has been around for a while, but we've enhanced it over the years. And we just announced a $30 million Germany award where the German military basically bought the full suite of our Puma capabilities, our Puma AE, our Puma Long Range, our Puma VTOL, our autonomous kits that get added to it. They bought the highest capable Puma system out there, and we are going to be delivering that this year as well.

So UAS is doing very well. It's been part of our legacy for a while, and we're continuing to invest in it and expand the production capabilities and be able to deliver on all these key contract awards.

That's great to hear. And I guess putting all that together, how do you think about margins across the business going forward as you've laid out your margin plans back in June?

Yes. So we did our Investor Day back early July, and we laid out our fiscal year 2030 targets. That took us from a revenue standpoint of growing roughly 15% to 20% over the next 4 years, getting us to essentially doubling our company between $3.5 billion and $4 billion.

We also put some financial targets around our EBITDA expectations. We're currently running -- last year was at 14.5%, we're guiding 14.5% this year, and we expect that to grow between 18% and 20% -- to 18% to 20% by fiscal year '30. The way that we're going to get that growth and that improvement is by -- obviously, the volume is going to help, but also the mix.

We're going to increase our product-related sales versus services. We're going to increase our firm fixed price type contracts versus cost-plus type contracts, and we're going to increase our international sales that typically yield a little higher margin than domestic sales. All those things we rolled out in July, and a lot of those things are already happening through these recent announcements.

The SCDE segment is where the LOCUST awards are being executed against. Those are going to help drive improvements in gross margins in the latter half of this year as well as into the future as we transition more and more of the technologies that were acquired through BlueHalo into the production levels that we're expecting.

Great. And maybe can we talk about despite those -- the 400 basis point margin increase in your target, R&D has been a big part of AVAV double digits over the last decade. You're normalizing to more of a 7% to 9% range. How do we think about where you're spending the dollars?

Yes, I'll take it. So historically, before the acquisition of BlueHalo, the AV -- old AV, I'll call it, R&D as a percentage of revenue was double digits between anywhere from 10% to even sometimes we went to 13%, 15%. The highest was actually 18% one year. I'm not indicating that for the future. I just -- don't have to panic about that. And BlueHalo had a lower rate. So the combined rate still, the dollars is much bigger, but it's about between the 7% and 9% as we discussed.

We think that that's the normal range for us for the next several years, and it's going to fluctuate from year-to-year. We have a very ferocious appetite for opportunities to invest in. But we're very judicious on how do we risk adjust these opportunities and rank them, rank and stack and then we make decisions on the portfolio level as to where we should place our bets.

Historically, AV has probably got one of the best track record of investing in a technology or an opportunity and then over the next 3 to 5 years, demonstrating how we can take that and build it into a franchise capability and product line and business line for us. So if you look at the history of our company, it's literally made up of those layers of the cake. We've got several of those today. Majority of the investments are going in these specific areas.

It's going into our bread and butter, multi-mission ISR drones, nonlethal drones, call it, precision strike systems such as Switchblade, Red Dragon, FE-1, et cetera. Counter-UAS is getting a very heavy investments, primarily the LOCUST and the direct energy systems. And then we have a whole bunch of other smaller earlier-stage investments for what we call them breakthrough capabilities that essentially becomes a franchise later on.

One of those that's actually you know about is Red Dragon. Red Dragon was not even known 3-plus years ago. We developed it during the Ukraine conflict, and it's going to be a significant driver of revenue and profitability for the company this and next year. And so that's usually our strategy. That's what we're going to end up doing.

We're fortunate because the market for us to invest is actually pretty good. The returns on these things look really, really good. And you could argue that we should be higher in some cases. But we're trying to balance two things: being judicious and methodical and very systematic in how we do this. And two, also, we don't want to get too aggressive and also make sure that we have profitable business and sustainable that way.

That's super helpful color. I guess as we think about some of those margin drivers, services and international, have you quantified the mix change or percentage change that you look to?

Yes. So the overall mix is going to help drive that adjusted EBITDA from 14.5% up to the 18% to 20%. As Wahid mentioned, our historical international portion of our portfolio was a lot larger a couple of years back. It has come to a smaller percentage as we've integrated a larger company with BlueHalo that was mostly domestic focused. So those percentages, we're sitting in roughly 20-ish percent right now in international exposure. We expect that to grow to 30% to 35%, probably not getting back to 50%. We don't need it to get back to that level in order to hit those adjusted EBITDA targets.

From a products and services, we're around 68% product, 32% services. We expect that to also improve. So a higher mix of product sales going into the mid-70s, which will help drive fixed price contracts, which will help drive margins as well. So all those factors are in play. We're executing to that. These key awards that we're winning are all evidence that our strategy is paying out. Now we're just going to see that our execution of the programs effectively and ideally, the margins will improve in the back half of the year and continue into '28.

Two more questions, and we'll wrap up. BlueHalo, where are you on the acquisition integration today? And where do you look to be in the next 6 months to a year?

When we did the acquisition, we had a very crisp and clear plan on a 3-phase approach on how do we integrate the business, how do we execute our strategy on this and how we go create value as the 2 businesses, 1 plus 1 equals way more than 4 or 5.

We're right now at what I'd call 2.5 phase, 2.5 roughly. Phase 1 was to basically get 2 organizations together, move the businesses and product lines in the right places, connect the plumbing and the wiring so we can function as a AV company. Phase 2, which is the heaviest part of the lift was to actually connect our systems to be able to allow us to scale, scale both in terms of operations, the cost synergies, revenue synergies, customers, products, et cetera. We're about 60% to 70% or 50%, between depending on which area you look at of that transition complete and successful.

Remember, this is a very large thing to take on, and we're going very deep in terms of integrating these businesses, very aggressively, very aggressively. There's no such thing as AV or BlueHalo anymore. We're one company, one -- we're trying to go into one ERP system, one HR system, one Salesforce CRM system, massive, massive amount of effort internally.

Third phase of the integration is actually streamlining our investments in products and aligning our R&D and SG&A investments to make sure that we get 1 plus 1 equals 5 or 10. That takes a little longer because then you have to start -- it has to be in a lot of new development on new products, new technologies that allows us to spend $1 and let 5 or 6 products benefit from that.

That effort is already on the way, too, but I would say it's probably 20% to 30% done in terms of just rough order of magnitude. And the last thing I would say is I'm very pleased with the progress we're making. Acquisitions, integrations of this size and nature is never easy. We have had lots of experience and track record here. And if you look at what we've been able to achieve, both -- we've already achieved the cost synergies. We had a target for the first 2 years. We achieved that during the first year.

We're ahead of our revenue synergy expectations and goals, too. In the last 12 months alone, we've won 4, 5 different $0.5 billion sole-source programs and franchises. Titan, Freedom Eagle-1, laser communication terminals, laser weapon systems like LOCUST, the list goes on. HELMSMAN is another program that we won. And so we continue to win.

And our record so far of being able to create the type of synergy that we wanted on the revenue side, I'd say it's quite, quite good. And so we're very pleased with that, and there's a lot more to come. There's a lot more to come. We're going to continue to work on this. And I think the combination of the two is strategically exactly what our customers want us to do and generate value for our shareholders.

Thank you both. I think that's a great note to end on. So I appreciate it. Thanks, everyone.

Thanks.

Good day, and thank you for standing by. Welcome to the AeroVironment First Quarter Fiscal Year 2027 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded.

I would now like to hand it over to our first speaker, Denise Pacioni, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, ladies and gentlemen. Welcome to AV's first quarter fiscal year 2027 earnings call. My name is Denise Pacioni, Head of Investor Relations for AV.

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 statements portions of such filings. Copies are available from the SEC or 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 Investors section of our website under Events & Presentations.

The content of this conference call contains time-sensitive information that is accurate only as of today, September 9, 2026. The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Joining me today from AV are Chairman, President and Chief Executive Officer; Mr. Wahid Nawabi; and Executive Vice President and Chief Financial Officer, Mr. Sean Woodward. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Denise. Welcome, everyone, to our first quarter fiscal year 2027 earnings conference call. I will begin today's call by summarizing our quarterly performance, followed by Sean, who will review our financial results in greater detail. After this, Sean, Denise and I will take your questions.

I'm pleased to report excellent first quarter results across several key financial performance metrics that meet or exceeded our expectations. AV reported first quarter revenues of $480 million with record-setting funded backlog of $1.5 billion as well as adjusted EBITDA of nearly $46 million and bookings of $683 million. These results reflect our focus on capturing key growth opportunities and our ability to execute with excellence. Building on our success from fiscal year 2026, we believe our first quarter results have positioned us well to deliver an even greater and stronger fiscal year 2027.

Before discussing the details of our strong results, let me first highlight some key achievements from the first quarter. First, we won several key contracts on franchise programs during the quarter that contributed to $683 million in bookings. These wins add to a strong bookings pipeline for both this fiscal year and beyond. Second, our funded backlog grew to a record $1.5 billion, which is 37% higher than the same period last year. Third, we achieved record first quarter revenue of $480 million. And fourth, we continue to advance our manufacturing capacity expansion plans across several of our platforms and products to support our strong growth over the next several years. With a strong quarter behind us and positive momentum carrying us into the second quarter, we are reaffirming our fiscal year 2027 revenue guidance of between $2.125 billion and $2.225 billion. And adjusted EBITDA guidance for fiscal year 2027 of between $305 million and $325 million. Both of our business segments are progressing well toward their fiscal year 2027 growth goals, supported by key domestic and international program wins and increased backlog and revenue contributions.

During the first quarter, our Autonomous Systems segment contributed $346 million or 72% of the total company revenue. While our Space, Cyber and Directed Energy segment contributed $134.5 million in revenue or 28% of the total company revenue, consistent with our plans for the quarter. Both segments contributed to the 25% increase in funded backlog from the prior quarter due to very strong order flow and several sole-source wins. Our total funded backlog now stands at $1.5 billion. Strong contract wins across multiple programs in both segments, particularly in counter-UAS, positions us for a record fiscal year 2027 and supports our progress towards long-term growth goals.

I would like to now walk you through some significant achievements since our last earnings call in each of our four main product areas, which are multi-mission ISR, precision strike counter-UAS and space and advanced technologies. Starting first with our multi-mission ISR product area. As we had mentioned on our last call. AB's P550 was selected for the U.S. Army's long-range reconnaissance program at the beginning of the first quarter with an award of $117 million. Successful integration into the U.S. Army's Next-Generation Command and Control System, or NGC2 and strong performance during recent field tests positioned the P550 as another key franchise program expected to drive future growth. We anticipate that LRR program to be a $1 billion program over the next few years.

Also during the quarter, AB was awarded a $30 million contract to deliver Puma AE and Puma LE systems for Germany's LARUS airborne reconnaissance program. This award represents one of the most significant European Puma procurement to date. In addition to these wins from our small UAS product line, our JUMP 20 and JUMP 20-X continue to make headways NAV's Group III or medium UAS offering. For example, our JUMP 20 recently received an NQ31A military designation from the Italian Ministry of Defense, formally recognizing AV JUMP 20 as an official military capability. This is a critical next step in the procurement process, enabling the Italian Army to accept deliveries of JUMP 20 and recognizing it as an element of its formal military inventory. With this recent announcement, JUMP 20 and JUMP 20-X have now won several international programs of record, just over the last 12 months alone.

Turning now to Precision Strike. We continue to see progress and momentum across several of our platforms within Precision Strike. Our comprehensive family of one-way attack, loitering munitions and launched effect products has the ability to meet our customers' immediate needs, while remaining adaptable to future requirements. Our recent Switchblade 400 award under the U.S. Army's low altitude stocking and strike ordinance or LASSO program is an example of EV's ability to quickly adapt our proven capabilities to meet new customer program requirements. Leveraging capabilities from both the Switchblade 300 and 600, AV Switchblade 400 is now a key solution set within the U.S. Army's LASSO program. Also during the quarter, AV received a $51 million U.S. Army contract for Switchblade 600, in support of a lethal unmanned systems, IVIQ.

Taken together, these two awards position AV as a long-term partner to the U.S. Army. With 20-plus brigade combat teams and 180-plus soldiers trained, these awards also reflect the U.S. Army's confidence in our solutions and our ability to deliver mission-critical capabilities at speed. Looking ahead, we are also seeing strong demand signals for our one-way attack solution, Red Dragon, and increased international demand in loitering munitions.

Turning now to our counter UAS portfolio. We're extremely excited about the progress we've made this past quarter with our multilayered counter UAS defensive systems. Both Titan and LOCUST systems received several awards this past quarter, which are strategic to the long-term growth of these franchise products. Just recently, we announced two significant wins for our market-leading counter UAS directed energy platform called LOCUST. As you recall, AV was awarded a landmark contract valued at nearly $465 million for the U.S. Army's enduring high-energy laser or E-HEL program in late August.

This award represents the first ever production contract for direct energy systems and U.S. military history. This is a defining moment, not only for our company but also for our customers, our country and the advancements of laser weapons technology as a critical tool in modern war pair. Following this announcement, we also announced our first international order for our LOCUST-directed energy counter UAS laser weapon system as a direct commercial sale. This order underscores the growing global demand for scaled high-energy laser weapon systems. As global threats continue to evolve and as asymmetric economics persist on the modern battlefield, directed energy has emerged as an increasingly important cost-effective solution for countering high-volume, low-cost drone attacks. Under $10 per shot, LOCUST redefines the cost balance between offensive and deepness of systems and provides the war fighter with an essentially unlimited magazine. We see these landmark awards as demonstrating the growing demand for LOCUST both in the United States and internationally and positions AV as a leader with the rapidly expanding directed energy market.

Building our momentum from these awards, we anticipate a growing pipeline of opportunities for our locust laser weapon systems, both domestically and abroad and look forward to sharing additional award progress with you in the coming quarters. In addition to these historic achievements with Direct Energy, Counter UAS, we also announced earlier in the quarter a major contract win for our RF detect into feed platform called Titan. Our Titan MS was awarded a sole-source $500 million IDIQ in support of joint Inter-Agency Task Force 401, domestic Shield program, which included an initial $80 million contract in support of the United States Golden Dome initiative.

Our Titan series of RF Jammers continue to be a market-leading solution in the world and a strong growth driver for the company, and we anticipate the use cases for its capabilities to continue to expand beyond traditional military applications. In addition to these two counter UAS program wins, we also announced the expansion of our Huntsville, Alabama facility in anticipation of additional demand for our Freedom Eagle-1 or FE-1 Kinetic INTERCEPT solution. Since winning the U.S. Army's long-range Kinetic INTERCEPT or LRKI program last year, our customer requested an accelerated production schedule, and we received additional congressional funding to support this acceleration of production and delivery of products on this program.

Our investments in capacity expansion will allow us to rapidly scale FE-1 manufacturing in order to meet the U.S. Army's urgent operational needs. This program is critical and selling critical operational requirements needed by our customers to combat low-cost drone threats.

Now let's look at the progress we made in our Space and Advanced Technologies Group. AV recently won a $43 million contract to integrate PANTHER, phased-array antenna on Sky Range platforms for hypersonic telemetry. This contract will enhance the nation's weapons testing capabilities and will help enable more frequent testing cycles and faster weapons development time lines, especially related to hypersonic equipment. These combined achievements across all four of our product categories during the first quarter demonstrate the breadth and capabilities of our products and solutions across the defense sector. With several of our products at an inflection point for multiyear sustained growth, we are focused on enhancing operational readiness. As we communicated at our Investor Day this past July, leading the sector in innovation has been and will continue to be a key priority for AV. The progress we made this past quarter demonstrates how that commitment is translating into meaningful customer wins and key franchise program awards across our diversified portfolio. As we build on this momentum, we're sharply focused on executing with excellence, increasing capacity, scaling production and delivering high-quality battle-proven solutions to our customers.

The investments we are making in fiscal year 2027 are designed to support future growth by positioning us to capture additional awards, expanding capacity across key sites scaling manufacturing with speed and efficiency and enhancing the resiliency of our supply chain. We are nearly 1/3 of the way into this fiscal year, and we're making significant progress towards achieving these goals. In fact, just after the close of our first quarter, we announced a $100 million long-term investment at our Southern California facilities to build a new state-of-the-art innovation center in campus. This new facility will consolidate operations and provide additional production capacity. In addition to this investment, we're also progressing on our Salt Lake City facility, where we plan to increase loading munitions manufacturing capability. This facility is expected to provide AV with the ability to meet increased demand across our Switchblade product lines well into the future, while also providing additional manufacturing capacity to support other products across our portfolio. This new state-of-the-art campus is on track for a spring of 2027 opening.

Earlier in the quarter, we also announced expansion efforts for our Albuquerque New Mexico facility where production is starting for our newly awarded locus contracts, along with additional future global demand. This facility is planned to be one of the world's largest and highest volume full rate manufacturing space for laser weapon systems used for defense applications. And as we mentioned earlier, we're also building our Huntsville, Alabama location for our Kinetic Intercept counter UAS solution, Freedom Eagle-1. These internally funded capacity expansion projects are specifically designed to keep pace with rising demand in both the near and long term. We expect that continued investment in our leading platforms will yield meaningful returns and drive long-term value creation.

Before turning the call over to Sean, let me summarize with the following comments. This past quarter was a great start to our fiscal year 2027. We delivered record first quarter revenues and funded backlog and won several landmark awards on franchise programs domestically and internationally and expanded production capacity across multiple U.S. facilities. Demand across our portfolio remains robust, and we were focused on executing with discipline as we invest in our business scaling manufacturing and stripping our supply chain to deliver for our customers at the speed their missions require.

With that, I would like to now turn the call over to Sean Woodward, for a review of our first quarter fiscal year 2027 financials. Sean?

Thank you, Wahid. I will now walk you through our first quarter performance and fiscal year '27 outlook, referring frequently to our press release and earnings presentation available on our website.

I am pleased to report a very strong start to fiscal 2027 with first quarter results meeting or exceeding several of our key financial targets. We exceeded our financial targets for the first quarter on revenue, adjusted EBITDA and non-GAAP EPS, while also achieving positive operating cash flow. We secured solid bookings of $683 million and ended the quarter with record funded backlog of $1.5 billion, up 23% from the prior quarter and higher by 37% from the same period last year. Relatively consistent unfunded backlog at $1.4 billion brought total funded and unfunded backlog at the end of the first quarter to approximately $2.8 billion. At the same time, we made significant progress on our capacity expansion initiatives that we expect will allow the company to quickly scale to meet expected increased global demand.

During the quarter, we announced several key capacity expansion efforts directly tied to growth on key franchise programs. First, we purchased and are looking to expand our existing facility in Huntsville, Alabama, to support near-term growth needed for our counter UAS kinetic INTERCEPT solution, Freedom Eagle-1. In addition, we recently announced a $100 million investment in our Southern California campus where we plan to improve execution on engineering, design and development alongside our production operations across multiple platforms. This investment will consolidate multiple existing lease facilities, resulting in an expected lower annual operating expenses. We are continuing to make progress on building out production in Albuquerque and New Mexico for our rapidly growing low discounter UAS solutions.

Besides these three capacity expansion investments, we are getting significantly closer to opening our new state-of-the-art manufacturing facility in Salt Lake City, Utah. This 120 square foot facility will allow for rapid scaling of our loitering munition products and provide additional space for other products that are facing increased demand. As discussed in detail at our July Investor Day, these investments directly support the strong demand we're seeing across our product portfolio. We look forward to sharing further progress on these facility expansions in the coming quarters.

Turning now to first quarter results. We secured bookings totaling $683 million in new authorized contract value. Our book-to-bill ratio for quarter 1 was 1.4x and reflecting strong demand from large program awards. Our trailing 12-month bookings exceeded $3 billion, representing a book-to-bill ratio of 1.5x. Total funded and unfunded backlog at the end of the first quarter was just over $2.8 billion.

Slide 6 of the earnings presentation shows the first quarter revenue by operating group, for each of our two segments compared to first quarter fiscal year '26 revenue. The Autonomous Systems, or AXS segment recognized $346 million in revenue in the quarter, which represented a 21% increase over first quarter of fiscal year '26 revenues. The Precision Strike and Defense Systems operating group generated $197 million in revenue in the first quarter, which represented an 8% increase over first quarter of fiscal year '26 revenues, driven by our loitering munition family, along with our one-way attack system and counter-UAS RF technique products.

The Uncrewed Aircraft Systems operating group generated $120 million in revenue in the first quarter, higher by 71% from the same period last year, led by strong domestic and international sales in P550, JUMP 20-X and Puma. The Space Cyber and Directed Energy segment generated $134 million in the quarter 1 revenue, down 21% year-over-year and in line with our expectations, reflecting the first quarter revenue loss from the scar contract termination, which occurred in March of this calendar year and other discontinued government programs.

Within the segment, the space and directed energy operating group sales declined 28% year-over-year due to discontinued carbon. For reference, scar-related revenue was $32 million during first quarter '26. The Cyber & Mission Solutions revenue declined 16% year-over-year, primarily due to discontinued government programs.

Moving on to gross margins. Slide 12 shows the adjusted product and service gross margin reconciliation to GAAP gross margin. First quarter overall adjusted gross margins of 30% were higher than first quarter '26 results of 29%. Quarter 1 adjusted product gross margin was solid at 40% compared to 36% for the first quarter '26. Quarter 1 adjusted service gross margin was 8%, which was lower than the 13% for the first quarter of fiscal year '26. The reason for the decline in quarter 1 service margin was related to our Cyber Mission Solutions business. Specifically, we experienced approximately $5 million in revenue impact from discontinued programs combined with other [indiscernible] and award delays, which made it more challenging to absorb fixed costs.

Moving on to operating expenses. Adjusted SG&A, which excludes intangible amortization and deal and integration costs, was $85 million compared to $65 million in the prior year. The increase was in line with our expectations, driven largely by key investments in infrastructure, along with expanded business development resources to assist in capturing growing global demand. Additionally, we incurred increased legal expenses and an unexpected nonrecurring bad debt reserve of $4.2 million in the quarter. As a percentage of revenue, adjusted SG&A in the quarter was 18%, compared with 14% in quarter 1 of fiscal '26. Full year fiscal '27 adjusted SG&A is projected to be between 14% and 16% of revenue. Quarter 1 R&D expense was $24 million or 5% of revenue compared to $33 million or 7% during the same quarter in the prior year. Full year fiscal '27 R&D is projected to be between 7% and 9% of revenue, in line with prior guidance. In terms of adjusted EBITDA.

Slide 13 of our earnings presentation shows the reconciliation of GAAP net income to adjusted EBITDA. Quarter 1 adjusted EBITDA reached $53 million or 11% of revenue. ASS segment adjusted EBITDA was $62 million for the first quarter of fiscal year '27 with an 18% adjusted EBITDA margin, reflecting strong revenue and gross margin contributions. This was partially offset by SCDE segment adjusted EBITDA, which was negative $9 million, which was expected following lower year-over-year revenue and resulting under absorption of fixed costs in both the Space and Direct Energy and Cyber & Mission Solutions businesses.

Now turning to non-GAAP earnings per share. Slide 11 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. Adjusted EPS reached $0.59 in quarter 1, up from $0.32 in the prior year quarter or an 84% year-over-year increase.

Moving to the balance sheet. At the close of the first quarter, our total cash investments amounted to $607 million, a $38 million decrease from the prior quarter. AMB Total debt composed only of 0 coupon convertible notes of $747.5 million and a net leverage ratio of 1.6x adjusted EBITDA. The company generated $13 million of positive operating cash flow in the first quarter despite making strategic working capital investments, primarily from higher unbilled receivables and inventory. The increase in inventory is intentional, supported by a record funded backlog and to ensure key critical components with long lead times are secured. As expected, free cash flow was negative $36 million in quarter 1, reflecting higher capital investments to support the expansion of our production facilities. We are still targeting fiscal year '27 to be negative from a free cash flow perspective, driven by the increased capital expenditures.

Now turning to backlog. Funding backlog totaled $1.5 billion at quarter end, which is 37% higher than the first quarter of fiscal year '26. Funding backlog composition by segment is $1.1 billion or 75% attributable to the AXS segment and $358 million or 25% to the [ FEEE ] segment. Unfunded backlog at the end of the first quarter was $1.4 billion, was $1.2 billion or 89% attributable to the SCDE segment and $157 million or 11% to the AFS segment. It's important to note that our unfunded backlog figures exclude ceiling values from sole-source IDIQ contracts. The remaining balance on the $990 million U.S. Army Switchblade contract, the remaining balance on the $874 million UAS and Counter U.S. SMS contracts and the remaining balance on the $500 million GIA-401 counter USRF contract, among others, represents significant additional contract capacity beyond our reported unfunded backlog figures.

Turning now to fiscal year '27 guidance. On Slide 7 of the earnings presentation, you will see we are reiterating our fiscal year 2027 guidance. Based on our strong Q1 performance, record funded backlog position and capacity investments underway, we remain confident in our full year outlook. As Wahid mentioned in his remarks, we continue to expect fiscal year '27 revenue to be between $2.25 billion and $2.225 billion, representing 10% growth at the midpoint of our fiscal year '26 results. We continue to expect adjusted EBITDA to be between $305 million and $325 million, and non-GAAP adjusted EPS between $3.02 and $3.34. Near term, non-GAAP adjusted pace remains relatively flat year-over-year due to higher anticipated depreciation and cloud amortization expenses for the significant capital deployed in fiscal year '26 and expected in fiscal year '27.

A few details on the revenue cadence, adjusted EBITDA profile and non-GAAP EPS distribution. We continue to expect revenue to be stronger in the second half of fiscal year '27. We're planning on an approximate 45-55 revenue split between the first half and second half. Following this revenue cadence, we expect adjusted EBITDA to be roughly 1/3 in the first half and 2/3 in the second half of the year. This is similar to the fiscal year '26 results from a distribution perspective and reflects improved sales mix and higher sales volume in the back half of the year. Non-GAAP EPS is anticipated to be roughly 30-70 split between the first half and second half. This reflects the adjusted EBITDA profile and the impact from depreciation expense and stock-based compensation timing. We continue to expect to invest between 7% and 9% of revenue in R&D and 12% to 14% of revenue and CapEx, primarily focused on production capacity expansion across all our product lines, supported by our total backlog.

Adjusted SG&A expenses are projected at 14% to 16% of revenue. In closing, we are very encouraged by our first quarter performance and the strong foundation it provides for fiscal 2027. We delivered a result above several of our key financial targets, generated solid bookings and continued to make disciplined investments in the production capacity and innovation needed to support growing demand across our portfolio. With total backlog of approximately $2.8 billion and revenue visibility to the midpoint of our full year guidance at 86%, we believe the business is well positioned for the balance of the year. Importantly, our recent counter yuans award including Titan and LOCUST are already incorporated into our fiscal 2027 outlook. As we continue to scale the business, we remain focused on execution, capacity expansion and long-term value creation in markets where we see sustained demand and favorable multiyear growth tailwind.

Now I'd like to turn things back to Wahid.

Thanks, Sean. As Sean stated earlier, we are reaffirming our fiscal year 2027 guidance. While we remain optimistic and encouraged by the urgency plays for our solutions and the Department of War budget. There remains some uncertainty around the timing of final budget approval by U.S. Congress. Our view is unchanged from last quarter, and we do not expect this to be a significant risk to our outlook at this time. Whether it is something we will continue to monitor closely.

In closing, we're very pleased with the progress we made during this past quarter. We won several significant awards, which increased our revenue visibility for fiscal year 2027 and provide a strong foundation for growth in the future. We remain focused on execution as we work to meet the growing demand in our markets with strong momentum across our portfolio and significant opportunities ahead, we believe the long-term potential for growth and value creation at EV has never been better and stronger. I would like to thank our employees shareholders and customers for their continued commitment to AV and our mission.

And with that, Sean, Denis and I will now take your questions.

[Operator Instructions] Your first question comes from the line of Andre Madrid from BTIG.

This is actually Ned Morgan on for Andre. I was just wondering, how should we think about LOCUST profitability? And what could the recent awards mean for CDE margins over the longer term?

So Ned, great question. As you know, we're at an inflection point in the segment to profitability profile and products that are being commercialized. The LOCUST product line is going -- it is expected based on the contract wins that we have and the future ones that we expect to win, to have a very strong margin profile going towards the second half of this year and beyond. That's why, as you heard from Sean and the comments on our guidance that the profitability is stronger and more lopsided towards the second half of the year. It's because a lot of the locust and a few other products in that segment is going to have higher volumes as firm fixed price contracts take over and the margin profile improves significantly. We expect the Locus product line and the segment margin profile to eventually get to the same model of the segment on over the next couple of years. So it is an infection are. We're growing very fast in that market. We're working on markets and solution sets that is going to set us up for multibillion dollar opportunities over the next several years. And as we said at the beginning of the year, as our plan was to continue to transition those into more mature production, high-volume direct commercial times, firm fixed price contracts, all of which is going to improve the margins.

Got it. And then maybe staying on LOCUST, are you able to comment on what your current production capacity is? And then what do you see as a sustainable steady rate production rates?

Well, so Andre, we are winning, as you see, some landmark contracts. The entire laser weapon systems, the directed energy laser weapon system market is essentially starting to begin to evolve now. The adoption rate and the knee on this -- on this curve is very steep. However, the supply chain and the suppliers that provide systems, subsystems for this is quite young, and we're scaling them and improving them as we go. That's why we made a significant investment in our Avoca [indiscernible] Mexico facility, to expand production. We are confident that we're going to meet the rising demand. It will not surprise me in about a year or so that this is a significant franchise for the company, well over $0.5 billion plus a year franchise. That has been part of our strategy when we acquired BlueHalo. We are making solid progress, and we're making solid progress also in terms of increasing production capacity. However, having said all that, it takes some time. There's lots and lots of long lead items. We have to do to get those in-house and scale those suppliers. We're bringing on more suppliers. It's a fairly large system, but we are sitting in a very, very good position. I mean I expect this product line to be a franchise flagship franchise for the company essentially competing with anything else that we do in the business in terms of revenue, profit profile and scale.

And our next question will come from the line of Louie DiPalma from William Blair.

Ethan and Sean, congrats again on the EHA contract.

Thanks, Louie.

I was wondering, you recently announced an international direct commercial sale shortly after the e-Health contract. And in terms of the total addressable market, how do you view the size of potential international sales relative to domestic sales. I know following the Ukraine war, you've been able to sell many Switchblade 300 and 600 to allies and you have a long history of selling the Raven and Puma to allies, but how do you view the international market for the laser weapon system?

Thank you, Louise. Yes, we're very pleased with these recent awards, as you said, not only do we win this marquee franchise contract and program with U.S. Army for $0.5 billion nearly. We also won and we announced a direct commercial sale for the first laser weapon systems that we are aware of to an international ally. We expect this to be the beginning of a lot more awards, Louie, number one; and number two, the market for these local systems domestically and internationally are going to the equipment powered size. You saw domestically, we've already won $0.5 billion contract, and we're going to -- we're engaged with several additional customers. And I think it's the beginning of this inflection point of adoption for the U.S. military, but beyond that, I see equivalent, if not more demand for these systems internationally. There's lots of places in the world, including the Middle East, Asia Pacific and Eastern Europe that could benefit from our systems because the solutions that exist today cannot economically be sustainable and sustain a long-term conflict where thousands if not tens of thousands of these group 1, 2, 3 drones are coming, and we're shooting million-dollar missiles at them. LOCUST solves that problem, both in terms of economics and depth of magazine. It's very, very unique in that perspective. So I tend to believe that there's a multibuilding market just for military application. If you fast forward this strategy 2 to 3 years later, I could also see nondefense applications for critical infrastructure sites. That could become available and suitable for adoption of our laser wait systems. And AV is unique because we're one of the very few companies in the world that have gone to a full rate production of systems that are deployed now in the battlefield today. That is a very unique position, and that's why we're expanding capacity because we think over the next several years, this could be a massive growth driver and value cation opportunity for the company.

Our next question will come from line of Peter Arment from Baird.

Sean, good to talk to you. Wahid, could you give us an update on kind of like you won some very large IDIQ contracts supporting the Switchblade production. Where do we stand on what's left in those vehicles? And what -- could you give us an update there?

Sure. So as you know, our win rate and our progress over the last several quarters has been phenomenal. I can't think of another time in the last 16-plus years I've been with the company, that we've had such tremendous track record of winning large strategic contracts. We've gone -- we had a lot of great years, but these are very unique years, and I think this is going to continue. In terms of what's remaining, there's lots of different contracts. Sean has the details on that. In general, there's several contracts that we have. There is a nearly $1 billion U.S. Army IDIQ sole source that we won, which is coming towards a full of value. And then we have an international one that's actually barely scratched the surface in terms of how much of that we've used. And then we also are working on additional contracts with other customers. Sean?

Yes, Peter. We have a couple of hundred million left on the current $990 million IDIQ under the current ceiling value remaining.

Got it. That's great. That's great detail. And then just as a quick follow-on. Just congrats on the P550 award. What's the next, I guess, what's the path for those 82 aircraft when you'll be delivering those? And is there another competitive down like we should be thinking about?

Sure. So as you know, the LRR program record that the U.S. Army has is expected to be about $1 billion value long term over the next several years. We are getting the lion's share of the awards. I believe it's between us and one of the competitors, well, we know that for fact, based on the U.S. Army's announcement. We're essentially getting where over 80% of the dollars of those awards so far, maybe close to 90% of the awards. We're actively delivering those systems as we speak. And we expect to deliver the vast majority of that contract this fiscal year, almost all of that $117 million this year, this fiscal year. That's why we've been ramping up production, that's why you've been making systems. And by the way, the most important factor for me besides us delivering is that the success of the product in the field, the satisfaction of the war fighter when they get our systems in their hand versus our competition is incredibly high, and credibly high. What does that mean? It means when the customer and the warfighter uses our product in the battlefield, and our systems work and deliver as promised and if not even more, and our competitors don't, the future acquisitions will be affected by that. It's natural. It's very common for that to happen. And so we expect the U.S. oil to continue to award more contracts as we go forward because they're just starting the fulfillment of that program, which is close to $1 billion over the next several years. And I think we're in a very good position, and I'm very thankful and appreciative of what our team has done, works so hard to get us at this stage.

And our next question will come from the line of Jonathan Siegmann from Stifel.

Congratulations on the orders. Maybe just to touch a little bit on cyber mission. $83 million for the quarter. We were glad to see some sequential growth from the second half of last year. That might suggest year-over-year growth might be possible in the back half of the year. Are there any headwinds strengthening or anything else that we should keep in mind when thinking about that subsegment?

John, so look, we're fortunate because we have a very diversified portfolio of products, solutions, businesses and groups of the business units as well. The cybersecurity and mission service is a fairly small part of our growth this year. We don't expect that to be at the same pace of growth as the rest of the businesses. We're making significant improvements there. It is not the main thesis of our strategy for growth for long-term value creation either. And so we've got plenty of growth, as you saw for this quarter on many, many other fronts. 7 or 8 different product lines platforms that are at inflection points to grow very, very handsomely, not only this year but the years to come. So -- but overall, we do expect that the financial profile of that business to improve. The growth in that business has never been expected to be as high as the rest of our businesses, but it's just a portfolio approach to our business, a diversified portfolio, and we're making progress. We're pleased with the results so far. We're going to continue to actually work on it. You should see more improvements financially in that business, but it's not going to have the kind of growth as the rest of the business because we were expecting that to begin from the beginning of this business. It's just not the same kind of a market, and the profile of that business is very different. However, for the year, we remain very focused on growing the entire business. As we said -- as Sean said on the guidance, 10% to the midpoint of our guidance range, year-over-year organic growth. We're looking fairly good, and we're positioned extremely well, and we came out the first quarter extremely strong.

That's really helpful. And was there any deviation on the timing that you expected on these awards? Was anything slower? Or just kind of wondering -- the question we're getting is why you didn't raise. So just hoping to couch on maybe some of the things that didn't go your way if things are just happening a little bit slower than you thought?

So John, that's a great question. We've asked ourselves that question several times, right? We believe that we've got a lot of work coming our way. There is one thing that's really uncertain about the market today, which is the timing of the fiscal year government fiscal year 2027 budgets. We have an election year, a lot of elections and uncertainty within Congress. That by itself represents a significant potential risk. We don't believe that's going to affect our current guidance, and it's only our first quarter. We just came out of the gate on our first quarter. We're positioned extremely well. And as things progress over the next quarter or so, we'll keep you updated. The long story for AV and the growth potential is fantastic. We -- I can genuinely tell you that for the years that I've been here, the rate of wins that we're having and strategic progress we're making in several strategic areas of our platforms and franchises, is positioning us for lots and lots of fantastic growth and value creation opportunities beyond fiscal '27. That's where we're focused on long-term value shareholder value creation. And I think we're on the right track in that set of the business.

Our next question will come from the line of Seth Seifman from JPMorgan.

Just wanted to ask, in the uncrewed systems business, we saw some strong results and pretty much no change relative to the fourth quarter, even though there's usually a meaningful seasonal step down. Anything kind of pulled forward there? Or any reason we wouldn't expect sales there to grow off of the Q1 level?

Seth. Yes. So the Uncrewed Aircraft Systems business performed exceptionally well in the first quarter, 71% year-over-year increase expected to continue with a significant growth this fiscal year excluded in our guidance. The strong awards that we got on P550, the increasing in the JUMP 20-X, a strong come sales that we're seeing both domestically and internationally all led to that sustained growth, and we expect to continue to see growth in this business throughout the next few quarters.

And then maybe as you think about the directed energy franchise growing to that sort of -- I think it was about $0.5 billion range. How do you think about the -- do you think about that as sort of a small number of relatively chunky orders? Do you think about it as having a large number of customers with a large number of smaller orders. When you look at it, kind of how that market evolves, how do you foresee that breakdown?

Seth, that's a great question. I'm going to all that out. This is Wahid. What I would tell you is that I'll go back in history, right? 4, 5 years ago, when the Ukraine conflict started, it was an inflection point in our royalty munition in one-way attack drone market as a whole. The entire market was tiny, very small. And what we saw in Ukraine collect that the use and the efficacy of drones in one-way attack drone, especially made a phenomenal impact and war fighting basically changed forever as a result of it. I think we're a similar inflection point on directed energy and counter UAS. All the weapon systems and defeat mechanisms that the U.S. has and all like as basically everyone in the world to address high-volume attacks by one-way attack loans, is economically not sustainable. We cannot continue to shoot down a $100,000, $150,000 Shahed drone with $1 million, $5 million to $10 million missile. It's just not sustainable against countries like China and Russia in the long run. The street full on that is a direct energy system that has an unlimited magazine of firepower and it changes the paradigm in economics from millions of dollars per shot to literally less than $10 a shot. That's what our LOCUST system offers today. That's why we won the first program record for pulp production in the U.S. Military's history. I can see in the next 5 years that, that business could be bigger than our loading munition business. That business grows to over $0.5 billion already over the last 4 or 5 years. And I think the market for laser weapon systems and direct energy is at least as big, if not bigger, globally. And we're just at the beginning of that adoption just at the beginning. And it's going to take some time because the U.S. Military has been working on us and all of our competitors for literally 3 to 4 decades. And we're the first company, to our knowledge, that has really cracked the code and is delivering systems that at scale that is actually effective and complex today. In the Middle East and Ukraine and other plots of the world, including the southern border. And so I consider this to be an inflection point. And over the next several quarters of the year, this business could grow dramatically for AV and the market is very large, long term.

Our next question will come from the line of Austin Bohlig from Needham.

Congrats on the solid results. Just wanted to spend a quick question on the current funding environment. Just given the Q1 strong results seems like things are picking up. Just curious if we could get a sense of like with the record funding or money that was appropriated in fiscal '26. Do you have a sense of how much of that is yet to be deployed as we get into the second half of the year?

Yes, Austin. So look, we have a great start on this fiscal year. We reaffirm the guidance because the visibility levels that Sean articulated which is historically very high. We should be able to achieve the outcomes that we have in front of us. That's why we reaffirmed our guidance for [indiscernible] scale. The biggest, what I call question mark is how fast can Congress approve the next fiscal year's budget. It's really not that relevant, whether it's $1.3 billion or $1.5 trillion, I'm sorry, or $1.8 trillion, whatever the number ends up being, as long as the budget gets approved and most likely it will be not less than this government fiscal year. I think it will be defined for AV because there are categories that we play in is significant dollars, okay? Now the timing of that is delivered at a risk. We don't consider that to be a risk for our current guidance. But if that were to go longer, then obviously the risk profile increases, and we're going to keep you updated. But -- and so that's number one. Number two, the reason why we're ramping up production and several of our products and several of our sites is because we're getting ready for a potential seen where the government is going to get the money and whoever can deliver at scale reliably and effectively most likely with a benefit. We have benefited from that in the past, and we're positioning ourselves for that this year as well. And so that's the reason why we're aggressively and judiciously investing in areas that we believe will have solid returns for our company, not only that this fiscal year for years to come.

Okay. Great. And then a quick follow-up, just on the recent announcements around tariffs and drone components. Just curious on what the impact could be to your guys' business.

So yes, the tariffs, of course, was a welcomed decision by our government in the Pentagon as well as the President. We do not see that as a negative impact on us. If anything, we consider that to be a positive. Why? The reason why is because over 98% of our supply chain and supply base is all domestic. We do not rely on export -- imports from foreign countries, especially in countries like China for any ore systems, any of our systems, okay, number one. The other 2% or so of our supply base are the closest allied in the United States, Canada, Germany, Israel, et cetera, et cetera. So we're in a very good position because we've been working on this problem ahead of the decisions, years and against. As part of the AV DNA, when we develop capabilities and reach a secure supply chain that we secure those with multiple sources and as much as possible domestically. That's a competitive and a explode. And so we don't expect that to get a negative impact, and it could be a positive impact because we can deliver cost effectively where the competitors have to actually adjust to that.

And our next question will come from the line of Peter Skibitski from Alembic Global.

Congrats on E-HEL for sure. Yes. I was wondering if you could update us, something we haven't heard in a while is just you used to update us on the number of countries you've been approved export systems to, maybe Switchblade, but new programs like [ Maven10, Red Dragon, maybe P550, ] I don't know if you had those at hand. I just wonder what we're up to in terms of the approved country list on some of those programs?

Yes. So Pete, a vast majority of our voting munition and precision strike systems have been domestic demand in orders that we've gotten, as Sean mentioned, on the $990 million plus U.S. Army contract for oil ammunition. That vast majority of that is domestic consumption. Some of it U.S. is taken to get to some of our allies, but majority of it is U.S., right? A lot of the growth in demand for Switchblade in the next second half of this year and also beyond this fiscal year, most of lately going to come from countries outside U.S., who we've been working with to get them to procure these systems in a water contract. We have announced a few of those, but there's a list of close to 20 different countries, allies that we've been approved for both FMS and DCS sales. The list is pretty large. And you will see awards to come in as we progress throughout this year and next year that is going to continue to grow the international adoption of Switchblade and movie munition and the other platforms that we have in the precision strike over the next several quarters and years. So I think you're definitely onto something that that business is going to continue to grow. The domestic demand has -- it really has been the dominant factor in growth so far, and it's going to shift a little bit more towards international demand. And it's still going to be a significant contributor to growth for AV overall for this year and next year.

Okay. Great. I appreciate that. Just last one for me. You talked about the Army LRKI maybe wanted to accelerate that. What do you think you kind of finish the test and certification phase and then enter production on that program?

So great question, Pete, because our strategy for counter UAS is not a one-pronged strategy. It's a layered defense approach. A layer defense system means that, first, we use the world's best genres to our Titan Series, which is one of our fastest-growing product lines and franchises, to be able to defeat drones that use RF communication. When that doesn't work, then you apply our laser weapon systems called focus. And if that doesn't work, then you go to their last resort, which is you use a kinetic missile or weapon to shoot down any drone that's from group 1 to 3. Today's arsenal of U.S. weapon systems and missiles, does not have an economically viable solution to attack, to address this problem. That is precisely the reason why this is a strategic priority for the U.S. Army. U.S. R&D wants us to go faster because they recognize that if they continue to shoot $1 million missiles at $100,000 to $150,000 Shahed, it's not going to be economically sustainable. So Congress actually provided us with additional funding just accelerate. We are aggressively attacking that. That's part of the investments we're making in our Huntsville facility. We have the support of Congress. We have the support of the U.S. Army, and we have the support of the Pentagon to accelerate that. We have won that, and it's our chance to actually build another franchise product line for AV. This year and next year, we're going to be in the rapid testing and certification of the missile. It's literally a brand-new missile for the U.S. military. And we are expected to deliver about 60 to 80 systems over the next 12 months or so to 18 months. And then once that is completed, then we're going to get into an initial rate lowering production and full rate production. The full rate production of that missile is going to be a $1 billion franchise long term. And that's probably about about 12 months away from now, given what it takes to get to that level over the next 12 to 18 months.

And our next question will come from the line of Trevor Walsh from Citizens.

Sean, maybe I'll start with you. I understand -- I appreciate the color around the gross margin on the services business. Is that really just going to be a function, or I guess how long is that going to stick with us in terms of that being a bit of a drag? Is it really just until the revenues come back to kind of cover the headcount, or are there other kind of dynamics maybe over the next couple of quarters that you guys can shift things around, so that's not as much of a factor. Just any additional color you can provide there would be great.

Yes, Trevor. Great question. Yes. So the services margins, we did see a downtick in quarter 1 compared to last year, mainly driven by the volume and the reduction in the overall business volume of our services revenue, with the Star contract being [indiscernible] of that revenue not being able to absorb the fixed costs. We saw the reduction in the gross margin as the volume increases through some of the key awards that we're expecting to be delivering on and the overall services revenues increase, we expect the margins to improve slightly. Services margin isn't really where we're focused on growing overall margins, really the transition to products and commercialization of our products is really where the expansion of our overall EBITDA is going to come from. But near term, the volume will be the major driver to improve the margins on the services side.

Got it. Okay. Great. Super helpful. Wahid, the LOCUST, E-HEL announcement included some commentary around some of the FAA approvals and such for using of directed energy domestically. Our understanding of E-HEL was that it was going to be a little bit more field-centric, deployed on vehicles, kind of more overseas austere environments, et cetera. Can you just maybe give us a little bit of perspective of how that deal can actually help to kick-start efforts here for more Homeland defense when, again, I'm presuming that those X3 are going to be more, again, forward deployed and just kind of give us maybe a little bit more sense of how one opportunity kind of leads to the next?

Sure, Trevor. So great question again. The E-HEL program is the first-ever program to our knowledge, where the U.S. military is awarded a contractor of full rate, high-volume production of our laser weapon systems to be institutionalized within the force structure. The initial deployment of this is going to be on critical sites that the U.S. Army has. But we believe that this is the beginning of an inflection point. We're actively working with the U.S. Air Force, U.S. Navy, U.S. Marine Corps and U.S. SOCOM and also a lot of other international customers. In the first time in the history of United States military, we witnessed in the last several week months, the Secretary of the war, Mr. Hegseth, the Secretary of the Army, the Secretary of the Navy, who have now become believers in using our local systems in the field, shooting down drones, shooting down drones, shooting down in a realistic real-life test environments. This is an inflection point in this business and in this category. U.S. has been chasing this for 3-plus decades. And we're the first company that's actually basically made, I believe button -- for them to push that I believe button. And so I think it's the inflection point. Yes, initially, the program was structured to put on vehicles, moving targets immediately after the event that happened in the southern border, the FAA said we can test these things to make sure it's safe to operate these and the national airspace domestically. It will [indiscernible] the United States. And our system is the first system to our knowledge that has actually been endorsed by the FAA that is safe to operate in national aerospace and it does not pose harm to commercial airlines and airplanes, manned airplanes. And so we're very pleased with that because the government and the agencies that are involved in this are moving very, very fast. But it's still a beginning. There's still the beginning. We expect additional wins, hopefully, over the next several quarters, and we'll keep you updated. We're in inflection point.

Our next question comes from the line of Austin Moeller from Canaccord.

Sean. So just my first question here on the locus laser weapon system. So 300 cartel drugs have been shot down year-to-date at the border. And the FAA has approved your system. So if we think about the DHS budget for which there's $70 billion in reconciliation that was approved back in June. When do you think that might start coming out in the RFP process? What kind of conversations are you having there?

Austin, again, a fantastic commentary question. bad DHS opportunity and problem is a significant one, but it's not the only one. We're engaged with several, several customers. As I said, the, I believe, button has been pushed now in several fronts on direct energy laser open systems, and especially the sweet spot that we're in, which is between 15 to 30-kilowatt system is the sweet spot of the market, lots and lots of applications. The specifics that you actually shared about 300 cartel drones being shot, we're very proud of. Our systems are working and operating effectively in the southern border and other areas of the country. And I think it's an inflection point. When exactly those dollars are going to show up in the awards will happen it's really tough to determine the timing of that precisely. We're working with them actively. The customers are trying to move fast, but they are clearly writing requirements holding competition as we're building and expanding capacity. And it's a multifaceted challenge and initiative, but I think we're positioned very well, and we'll keep you updated as we go forward. There are several, several customers they're working with beyond just U.S. Army and DHS that should result to some additional wins over the next several quarters for AV.

Okay. And then are you able to comment on the build rate ramp for Bread Dragon as facility expansion and CapEx is deployed there for that line and the potential for the U.S. military to maybe pull some of those rent dragon orders forward maybe from some other customers, just given the range could be used in Iran.

So I can only comment on this briefly at a high level, Austin. You're absolutely right. We have a winning solution that is very unique in its capability and its efficacy, especially given the kind of conflicts that are going on and the threats globally. Lots of engagements and demand for that. We're ramping up production. We have designed a product to get into the thousands of units a year of production. We're ramping that up actively today. I'm not able to comment specifically on where we are because of the sensitivity of that mission and customers. What I can tell you that we're making great progress, and we should have an update for you in the near future. You are absolutely right, that capability is a necessity, not a nice to have, it's a must-have and the type of conflicts we see in the world, and we're engaged with those customers. They're trying to moved quite aggressively, but it still takes time. And it's just a matter of just hopefully some timing that we're going to make progress. We're not waiting for the customer contracts and progress there. We're in [indiscernible] actively based on very strong signals for our customers and engagement with them. We're ramping up production. We're building units, and we're ready to scale this, and we're actually scaling it right now as we speak. This is the reason why we're investing in new facilities. Buying [ logging ] material, building units in stock because we know that the demand is coming. We know our customers need it. It's just a matter of how fast they can get in the contract.

Our next question will come from the line of Cashen Keeler from BNP Parabas.

Obviously, you guys had a solid first quarter results here on revenue. But with you still expecting 45% of revenue to come in the first half that implies about a $40 million step down in revenue in 2Q relative to what you guys said on the last call about the 1Q, you split if we just take things at the midpoint. So just kind of wanted to unpack that and if there's any particular reason for that.

Yes, Cash. Great question. We're still holding to our 45-55 split. We got fantastic backlog. We've seen the back half of the year really been an increase in the overall volumes for our revenue. We did really good in Q1, we're able to deliver above our expectations. But the first half of the year, we're still tracking to the 45% and 55% in the back half of the year. Well supported by our viability at 86, and overall increased volumes in Q3 and Q4. SP1

Got it. Okay. That's helpful. And then a couple of weeks ago, there was a memo from Deputy Secretary of war regarding greater cost transparency and basically setting margins across the industrial base. So I guess how can we think about that? And what impact that might have on your ability to maintain your kind of margin edge over, say, like legacy defense businesses and hopefully expand margins over time towards your 2030 targets.

Cashen, we are absolutely supportive of the government's effort in this area. You know as well as we do that AV's business model strategy is incredibly unique and enticing and compelling. That particular directive is obviously directed to the entire market and all the suppliers. But we see it more directed to the much larger prime where the department has significant serious challenges. On visibility to their supply chain, their cost models, their cost structures, their rate structures, et cetera, et cetera. We don't see that to be an impact for us whatsoever. We welcome it. It's still very premature. It's an audacious task that the government is going to be taken on, not easy to actually implement such an effort. I really, really support them on that upfront. We welcome it. We do not see that as a problem. We welcome it. We're ready. We're working with them. We spend a lot of own money on R&D, internal R&D to develop our products as commercial products. This is the AV business model that we've been working and executing successfully for multiple decades, ever since we've been public. It's almost 20 years now, and we've been doing this. And so it's nothing new to us. we welcome it, but I don't see it as an issue, and it's more targeted towards much larger clients where this problem is much more acute and a lot more dollars that slots around on lots of munitions and space programs and other things.

Our next question will come from the line of Brian Dobson from Clear Street.

So at the risk of beating a dead horse, I'd like to ask one more question on LOCUST. You gave some very exciting commentary about perhaps that product being adopted across military branches and a variety of venues. You also signed an international contract. Can you speak a little bit to the demand there. And perhaps how quickly you see international sales scaling in comparison with what seems to be a pretty steep ramp in the United States?

So Brian, I'm very optimistic about the international demand for our LOCUST systems. I tend to believe that the revenue may accelerate even faster internationally, given the kind of challenges that a lot of our allies have around the world with drone attacks. Look at what's happening in Eastern Europe look what is happening in Ukraine, but what's happening in around the Black Sea, Persian Gulf, Epic Fury, Middle East, Asia Pacific, prime, prime, prime urgent needs for these countries to protect themselves. And they just don't have the magazine depth to be able to withstand the type of attacks they're getting from some of our adversaries such as Iran and others including Russia. So I think this was part of our strategy from the beginning because we know the sweet spot for Counter-UAS is directed energy laser weapon systems. And we've got the world's best solution, it's performing, it's working, and we're scaling it. And exactly when those awards are going to come in, I think it's very difficult to predict that. But we do have several engagements, and I think those are going to continue to come in, and we'll keep you updated. The key was to get the inflection point, the U.S. Army to endorse it, select us officially saying that we're going to deploy this FAA to approve it and support it and endorse it. And then now everyone else is going to fall, not only domestically but also internationally. If playing according to our strategy, just perfectly, nearly perfectly. And while that's happening in the market, we're in parallel ramping up production, building systems as fast as we can. And that's just day's time.

Our next question will comes from the line of Clarke Jeffries from Piper Sandler.

I guess I'll start with Sean. Wondering if you could comment on the major drivers of cash outperformance in the quarter. What changed in your view and how you see receivables growing or shrinking over the coming quarters. And then just is the CR explicitly considered in your full year guidance for negative free cash flow?

Yes, Clarke, great question on the cash. We had a positive operating cash flow in the first quarter, $13 million, very favorable on that. We're really working to manage the cash as especially as we can while also strategically investing in inventory to get ahead of some of these long lead items and get that in stock to support rapid delivery of our products. We're anticipating managing the cash from a free cash flow perspective for the full year being slightly negative, driven mainly from the CapEx, managed working capital favorable growth in EBITDA and net income, but really the CapEx is going to drive us to the current year increase in CapEx, driving the free cash flow is negative. We don't anticipate that carrying into next year, we expect to see our capital levels return to more normalized level as this is an inflection point on our production capacity expansion in fiscal year '27. Regarding your second question on the CR. So that is factored into our guidance. We stated that in the last call, things have progressed pretty much exactly as we expected, a short-term CR followed by an approved defense budget, that's what we're expecting to happen in the December time frame. And our guidance currently reflects that.

Perfect. And then if I could just ask a follow-up. Just Wahid, you had this announcement around a joint venture established in Greece. I was wondering if you could just share an overview of where you're at with localizing production in Europe, where you intend that to go? It sounds like any kind of CapEx requirement is already considered in guidance. But just curious, as we think about the maturation of unmanned systems, how many of these countries that might be targets for foreign sales might want to move forward with an industrial work share agreement or localized production.

Welcome, Clarke. So we're engaged on with several countries. We've announced a Greece joint venture. We've announced our presence in U.K. We already have presence in Germany. We have a joint venture, a small one in Turkey. We also have efforts that we announced in terms of our teaming agreements and announcements in Taiwan. You're going to continue to see more and more of these over the next several quarters and years to come, both in Europe as well as in Asia Pacific and also in the Middle East. Those are the three focus areas: all of Europe, Eastern and Western plus Middle East, plus Asia Pacific. And then those countries are very specific. The reason for that is because the demand and the government's desire for our systems is quite strong, and it requires some level of local content and local presence, both in terms of engaging with those customers, but also in terms of actually producing subsystems or doing final assembly. The Greek militaries made public statements that they're going to be procuring a lot of loitering munitions and specifically Switchblade as run of those particular items. And it's in the government's budget process. It's gone through their parliament of it. And I've met with their top leaders, and it's actually progressing quite well. And so that's just not the only one though. We have similar engagements in other parts of Europe and Asia Pacific and in the Middle East. And I think you're going to continue to see us progress there as part of our international expansion and growth, and you're going to see more such announcements that happen over the next several quarters and years to come.

Our next question will come from the line of Gavin Parsons from UBS.

Wahid, you've talked about needing to demonstrate capacity to unlock awards. I mean, is that what we're starting to see in these bookings? Or do you think bringing [indiscernible] and Albuquerque, et cetera, online will unlock more?

It's a combination of both. Yes, the current investment that we're making in our facilities, and we have made over the last several quarters and even last year, has already yielded very strong growth, right? When Ukraine more started, we aggressively expanded the production of our Switchblade facilities. We aggressively increase the demand and the production of our Puma systems for Ukraine. And then at the same time, when additional demand was needed for, we build the [indiscernible] facility. So we've gotten award for that. When we develop the P550, we expanded facilities for P550, U.S. Army gave us an award now. And so Titan the same thing, we've increased the capacity for our counter UAS systems. There is a direct correlation and link between us investing in showing our customers that we can deliver and producing and delivering on time and a reliable product to the customer and getting a lion's share of the business. Many people can claim that they have it, or they can do it. But unless they demonstrate, it's not the same thing. And what sets us apart is that we continue to deliver, execute and demonstrate to our customers that we're a safe bet. And so I think that's been working for us. Additional capacity expansions that we're making now on LOCUST, on RedDragon on Freedom Eagle-1, all of these are going to yield more success and awards over the next several quarters, in my opinion, because we're talking to those customers, and they're engaged with us and they want us to do that. And so it solves the government's problem because they don't have budgets that are long term, and when they get the money, they want to give it to people package to deliver right away or quickly and reliably. And that is [indiscernible] we're one of the top companies that can do that actually successfully, and we've demonstrated it.

Got it. Okay. And then just back to 2Q kind of guide, I appreciate it's early in the year and there's still a lot of budget unknowns. But is there anything specific in 2Q that steps down EBITDA, even while revenue increases?

Yes. So Q2, the way we laid this out with our revenue profile at the 45-55, the back half of the year being a more favorable volume and improved sales mix. That was driving the EBITDA in the second half of the year. First half of the year, we delivered really strong in Q1. And in Q2, we see a little bit of a step down even though the volumes of higher the overall sales mix is slightly below, and then our increased IR expected to tick up in Q2.

And our next question will come from the line of Ron Epstein from Bank of America.

This is Andrew on for Ron. I just want to focus on Greece for a second. There's a question a few moments ago on it about the AV Eagle joint venture. You guys announced that in August. And then this week, Greece announced a multibillion-dollar missile defense deal was signed. So I was wondering, what are you guys seeing there in terms of demand specifically for directed energy systems given the recent locust wins? Is there a place for locus in Greece's new Achilles Shield system?

Yes. So Andrew, we're engaged very closely with the Greek military on several fronts. I have personally met multiple times where the Chief of Defense. And the gentleman who was very reputable, very credible and very focused. They are very laser-focused on making sure that they adopt a large portion of their procurement to be things such as loitering munition and specifically Switchblade. So we're engaged with that. There's a competition. I can't comment specifically on it, but they do have funding in the budget that's going through their parliament and to the -- for approval, they made public announcements on that and statements and has been well documented in that regard. In terms of their laser weapon systems and the need for that, we're already engaged with them the existing the contract you described is something a little bit specific. It does not include our focus today. But it could easily expand into that and they're absolutely interested in that. They were more waiting for the U.S. Army to select on E-HEL, that E-HEL announcement and success, most likely going to actually instigate many allies, not just Greece, to become more sort of bullish and aggressive and their effort to try to procure systems such as Locus. I feel really good about it. I think we engage with several countries on that front, not just Greece. But the main focus on Greece today is about products such as Switchblade and our JUMP 20 and other systems, and the LOCUST systems are looking farther behind on that front, what we specifically.

Got it. I appreciate that color. And I guess just a quick follow-up. So was the recent international contract kind of a similar dynamic where the customer was waiting to see validation from the U.S. R&D.

The answer is yes, Andrew. Validation from two fronts. The U.S. Army, of course, because U.S. military and approvals and program record selection is the golden standard allies in general. You have seen that in our 20-plus year track record. When we win [indiscernible] records with the U.S. Army for Puma, for Raven, for Switchblade, for Titan, whatever product we win programs with the U.S. military, it almost always translate into adoption internationally with not one only with several of them. So that was one. The second key criteria that was also for them to come to United States, go to the field test and push the I believe button by shooting down drones themselves in the field. They did that. We demonstrated it. Our system worked while the competitive systems are not working, and therefore, they give us the award. And we expect that to continue with additional customers. That has always been our strategy to just basically demonstrate and deliver. And if we do that, obviously, adoption will occur. And that's consistent with our strategy with LOCUST as well.

And this concludes the question-and-answer session. I would now like to turn it back over to Denise for any closing remarks.

Thank you once again for joining today's conference call and for your interest in AV. As a reminder, an archived version of this call, SEC filings and relevant news can be found under the Investors 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. Goodbye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Good morning, everyone, and welcome to AV's 2026 Investor Day. It's wonderful to see so many of you here in New York. We are very excited to share with you the progress we've made since our 2024 Investor Day just over 2 years ago.

With a continued focus on innovation, we are more than ever intent on capturing opportunities in this high-growth sector as well as scaling the business and executing with excellence. We are excited to share with you some of our key strategic initiatives that will lead us toward achieving our fiscal year 2030 growth targets.

Joining me here today are several key members of AV's leadership team, including our Chairman, President and CEO, Wahid Nawabi; our Chief Growth Officer, Church Hutton; and our 2 newest leadership team members; Sean Woodward, CFO; and Dr. Rob Smith, COO. In addition to presentations by these gentlemen, we will also have our 2 segment Presidents, Mary Clum and Trace Stevenson, available for questions and answers at the end of today's session.

Before we get started, please take a moment to review our safe harbor statement located on the screens to your left and right. As a reminder, this event is being webcast live and will be archived on our website under the Events & Presentations section. WiFi passwords are located on the tables in front of you, and we ask that you please silence your phones at this time.

Before kicking things off today, please take a moment to watch this short video showcasing many of the exciting solutions AV has to offer.

[Presentation]

It's now my pleasure to welcome Wahid Nawabi, AV's Chairman, President and CEO, to the podium.

Okay. Good morning, everybody. Welcome to this beautiful day in New York City here at the Westin Times Square. I want to thank all of you for actually taking the time to be here with us today, number one.

Number two, the last time we were together like this was actually about 2 years ago. I'm not sure if some of you remember, and it's been 2 years since we actually came in a venue like this and had an event like this. So it's a great pleasure for me to actually see most of you who were here 2 years ago. And also, I've got a couple of slides to show you what we've done since last 2 years and what we promised then and where we are today. And so hopefully, it will be a good barometer of what we're going to talk about today for the future of AV.

We have a full agenda today and essentially, I'm going to walk you through the company as to who we are and what really is relevant about our company and about competitive differentiators. Then our Chief Growth Officer is going to walk you through the growth strategy as to how are we going to capture the growth that really is in front of us in this market. And then we have our Chief Operating Officer, Rob, who is going to cover the actual execution part of how do we execute in scaling and capturing the market. And then lastly, Sean Woodward, our CFO, is going to talk to you about the financials and the long-term targets. And then, of course, we'll have plenty of time for Q&A as well at the end of the presentations at that time.

First and foremost, let me talk about the company overview. For those of you who are not familiar with us, we are a growth company squarely designed to meet the rising demands of what's considered to be the top key strategic priorities of our Department of War as well as our 50 or 60 different allies around the world. We have not gone here by accident. We have built our portfolio very deliberately to meet the rising demands of the pretty much highest priority items that are in the U.S. Department of War's strategic needs and capability gaps. And we've got a fantastic track record as an organization. If you go back the last multiple decades of what we say we're going to do, what we're going to focus on that we're going to go do and then how we actually execute to capture that and deliver on that, that is something that is unmatched in the industry within our peers in that regard. And we've done that in a very diversified, very methodical, very judicious approach of investing in different areas and also in making sure that we actually set realistic milestone for us to be able to achieve as part of our growth strategy.

We're organized in 2 business segments: AxS or Autonomous Systems and Space, Cyber and Directed Energy business, which is the 2 segments. The AxS segment is roughly about 2x the size, roughly speaking. And the combined, as you saw our financial results a couple of weeks ago, it's about a $2 billion business for us today.

We are spread around multiple sites across the country and overseas, about 4,000 employees in total. And one thing that I really take a tremendous amount of pride is the number of systems that we have fielded successfully in the world, not just the United States, but 55-plus countries, over 60,000 systems, 60,000 different units of our ground -- air robots, ground robots, et cetera, et cetera, and all the different domains that we play in.

And even more interesting and important than that is in the last 2 decades, we've been involved in every single conflict that the U.S. has faced around the globe. And our solutions have been critical, not just a small piece, but a critical part of the U.S.'s track record of success in competing in these markets and actually fighting these conflicts over the last 2 decades, consecutive conflicts. So we have a battle-proven solution set. We have a track record that our customers understand the value of our solutions that they can believe in the operational capability of our systems. And we iterate on that over and over again to bring new products to the market as we go forward.

So the way I'd like you to think about our business, which is something a little bit new today, I'm going to cover it, is essentially the 4 different areas or portfolio categories that we play into, which is multi-mission ISR. This is predominantly considered as nonlethal drones, but there's now the missions are changing and evolving. And some of the nonlethal -- almost all the nonlethal platforms are capable of doing lethal or other type of missions as well. Then it's all of our strike solution sets such as our loitering munitions, our one-way attack, and Freedom Eagle-1; our counter-UAS solutions, that's counter drones; and then lastly, the space and advanced technologies that has products in that category. So if you look at the overall company portfolio, I would make a case that we're really organized in these 4 key mission areas that's really relevant to our customers' need.

What's the investment thesis? What's most critical about the investment thesis for AV? First and foremost, we are a trusted defense partner for our customers, not only the U.S. military, but 55 allies around the world. We're not an unproven name with an unproven track record of performing or an unproven track record of delivering to our customers' expectations. It is one of the key strategic differentiators that sets us apart from hundreds, if not thousands of companies that I've seen in this industry over the last 2 decades. In the last 1.5 decades, I've seen over 1,000 different companies come and compete with us in this market. And what really sets us apart besides many other things that I'm going to talk a little more is the fact that we have been around, our solutions are relevant, we're trusted by our customers. When they place their confidence at AV, we deliver on their missions and their expectations.

Number two is the diversified mission-aligned portfolio. Our portfolio has been developed and we continue to invest in expanding this portfolio deliberately to meet the highest needs of our customers' priorities. These are areas that are incredibly critical in the future conflicts that you see around the world today and in the future as well. So it's not an accident that things that we are in, the categories that we're in is relevant to what's happening in this, what I call, transformation in the defense industry. And as a defense tech player, we are leading that transformation with category-leading solutions. And every single one of these categories that I'm going to walk you through, you'll see our solution is category defining. In some cases, we've actually invented the category. And there are some multiple examples of that as you see throughout this presentation.

Third is our strong balance sheet. We've been around for 50-plus years, and we've been profitable as an entity, and we're going to continue to do that. That is also somewhat unique because our customers and our investors can count on us being around and having a balance sheet that can actually execute our strategy. And it's deliberate. We intentionally want to make sure that we're a company that not only delivers, but we have the ability to continue and have longevity for our customers to trust us for years to come. And that trust and that confidence is also very important for our other 2 stakeholders: our investors and our employees as well.

And then lastly, we are built for growth. We have built our company and the capabilities that we have specifically focused on growth. And you've seen from our record over the last decade plus what our growth rate has been, and I'm going to share some of the details of that for you in a few minutes. But we also are building ourselves for the future growth of the company and positioning ourselves really well. For example, the products that we are investing in are relevant, not only today, but we feel very strongly that these are the capabilities that are going to be in need over the next decade or so.

Two is our production capacity and our ability to deliver. The world is changing. The customers are expecting fast turnaround, and that is a recipe that AV has perfected over the last decade consistently and very successfully. And so these 4 theses sets the foundation of a unique value that we offer as a company for investors as well as for our customers and our employees.

I said that we were here together about 2 years ago, in this ZIP code, and I wanted to share with you what we've said we're going to do and how we did, okay? And so let me walk you through some of the specifics of this slide or these topics in a [ scorched ] fashion.

Number one is we said that we targeted long-term organic growth of about 10% to 15%. That's been roughly our target over the last couple of years. Well, our organic growth has been around 20% over the last 2 years that we were here, okay? We said here.

The second thing was that our TAM is a certain size. It was roughly about $30 billion market TAM at that time. That TAM, the total addressable market, has grown to well over $80 billion today, okay?

We said we're going to grow our capacity and build world-class products. In the last 2 years, we have launched over half a dozen category-leading, industry-winning track record in terms of track record of winning products -- innovative products to the market. And you see examples of that almost every month or every quarter that is being announced by awards and successful contract wins for AV against our competitors. Vast majority of those wins that we get are usually sole-source wins by our customers, whether it's domestic or international. That has been our track record, and you'll see that examples throughout today as well.

We also transformed our company over the last 2 years by adding the key other domains, which were capability gaps in our portfolio, and we -- both organically and inorganically, we have filled those gaps to increase our portfolio and enable us to actually be offering our customers' complex end-to-end mission capabilities to their mission needs. So for example, we added the category of counter-UAS. We were not a strong player 2-plus years ago in the space industry, right, space tech. We are one of the leading players now in terms of the solution sets that we have in that area.

Cybersecurity, we are at the most critical cybersecurity missions that is being executed within our military across all the areas or the geographies of the world that the U.S. operates. And so over the last 2 years, we've created an enormous amount of value, we believe, on our capacity increases, in our footprint, in our portfolio and our size of the market and our growth rate. And I genuinely believe that most of that value is not reflected in the valuation of our company in the stock market price. So there is significant value in our company left in terms of what we've achieved in the last 2 years and where the valuations are for our business in that regard.

Okay. So let's just spend a little bit of time on these 4 areas that I would like you to sort of think of AV as a company. We have a lot of products and we do a lot of different things and we have a diversified portfolio. But if you look at it from a simplistic, holistic way, we're in these 4 critical areas.

First, multi-mission ISR. We have the world's, not only leading, but award-winning products, innovative capabilities that we have launched over the last several years in this area. In my estimation and my assessment of the market, we've got the largest and most unique portfolio in terms of competitive advantages in the market. The Puma series, it's a massively successful franchise globally, right? The Puma, Puma AE, Puma LE, Puma VTOL. We also have our JUMP 20 and JUMP 20-X in this category, which is also the leading Group 3 drone in the market globally, and it continues to win program records, allied customers, domestically and internationally.

And lastly, you saw the P550, which is here in the room, on the left -- on my left, your right. That is a product that we just launched less than a year ago. And we were just awarded a very significant contract a couple of weeks ago, less than 2 weeks ago I believe it was, by the U.S. Army for the long-range reconnaissance program of record. It's $117 million initial contract, and the value of that program is expected to be over about $0.5 billion to $1 billion again, okay? So we are a dominant world player when it comes to multi-mission ISR portfolio and solution set focused on our customers globally. And we provide these things to not only U.S. domestic customers, all branches of the military, but also to 55-plus allies around the world.

The next category is our strike solutions or strike capabilities. And that includes products such as our Switchblade family of loitering munitions, which is a category that we essentially invented in the market. I vividly remember, 10 years ago, if I walked into a room of customers or even investors and ask them what's loitering munition, more than half of them didn't know what it was. Today, it's a household name around the world. And Switchblade is known around the entire globe as to what it does and how it actually performs. So that's the product set that fits in there.

Our one-way attack drone is another set of innovation that AV launched to the market less than about a year ago. And we've got multiple awards in that product set as well from our U.S. customers. It's the Red Dragon family of one-way attack.

And then I also want to add in this category, we have our kinetic kill solutions called -- our strike solutions called the Freedom Eagle-1. And we're aggressively accelerating the completion of the development of that product so we can transition into a full rate production -- initial rate production, low rate initial production within about 12 to 18 months from now. We've got a contract, we've been awarded. We've been down-selected by the U.S. military, U.S. Army, a program called Next-Generation Counter-UAS Missile, or there's a new name for it, LRKI. And that program is also something that is critical to the U.S. DoD success. That's the second category.

Third is our counter drone business, or counter-UAS system. That's where we have our multilayer solution sets, including our jamming systems, the Titan series of RF jamming solutions, Detect and Defeat. And then we have our Laser Weapon Systems called the LOCUST system, that you see on the right side -- my right side here. And X3 is a new product we just launched less than a couple of months ago or about 2 or 3 months ago.

And we believe that these solution sets -- and the last piece on that counter-UAS is also our kinetic kill solution called the Freedom Eagle-1, which was actually designed and developed for that specific mission for counter-UAS, but it has applications beyond just counter-UAS. Again, so this is another category that I want you to think about our portfolio set as to how AV is into another category with market-leading positions.

And then lastly, in the space and advanced technologies, we're focused on things is our phased array solutions called the BADGER series and the WASP. We also have our capabilities and the laser communication terminals, which is also on my right -- one small solution set on the right side, next to the Titan series. It's basically ability to communicate via optical laser communication on very long distances. We're talking 50,000 plus miles away from earth. So essentially, every satellite that you can imagine that the U.S. has in its possession, our laser communication systems are relevant to be able to actually increase capacity of communication and bandwidth to those systems and make them also more or less susceptible to jamming and defeat. So think about the business.

And the other thing that goes into this category is also our cybersecurity systems and solutions, plus a series of new innovations that I am certain, in the next few years, you will see new innovations that we launch in the market that gets us into new categories.

And then lastly, another piece that's in the advanced technology is also software solution set. That's the foundation layer that's across all of our products. That's not in one of the -- it's not in one of these 4 categories. It's across all of them that connects these systems, that enables these systems to be more intelligent to do missions more effectively for our customers and also reduce the cognitive load on our -- the war fighter. And that's the foundation layer software ecosystem called AV_Halo that we've launched last year. And as you could see, 2 years ago, this was a much more narrow set of capabilities, portfolio offering and solution set versus what you see today in the market we've launched.

Okay. So let's talk a little bit about the products, the innovations that we have launched to the market and the 4 investment theses. The first one, as I said, is lead with innovation. What really sets us apart in this area is the fact that we invest a higher percentage of our revenue on R&D to begin with. Roughly between 6% to 8% of our revenue on an annual basis, we continue to invest in R&D. And that R&D not only is, relatively speaking, to the industry standards, higher, but another unique characteristics of AV is the speed and time to market. We invest ahead of our customers' needs and requirements. We anticipate where the need and the requirement is going to be, where demand is going to be. And we invest our dollars very judiciously to develop solutions to launch to address those markets and those customer needs effectively. That is something that is very unique to AV, and it's been talked about today in the entire industry.

We've been doing that for 2-plus decades. And not only we've been doing it, we've been doing it very successfully. If you look at our portfolio of products that we offer in this particular topic, it's remarkable, remarkable literally. Just in the Switchblade family, the solution set that we have today that we've just launched in the last 2 years is remarkable. We've added Switchblade 600. We're on a second-generation Switchblade 300. We're in a second-generation Switchblade 600. Most competitors are actually just starting to develop a solution set. We're in our second-, third-generation products. We have introduced Switchblade 400 this past year. And we introduced MAYHEM 10, which is sitting on my right again, which is another category killing product targeted on specific programs of record for our customers.

So we are incredibly close with our customers. It's part of our recipe to be able to know what the customer needs are going to be, what the capability gaps are in the market. And then we invest in developing solutions quickly, and then scaling production so we can be ready when the customers' needs and dollars are available. That is unique to AV as a strategy, and it's been in the past as well.

And then I don't want to underestimate or undermine the other capabilities that you see on this slide as examples, okay? So for example, the one-way attack drone, the Red Dragon. We launched that product or announced it to the market, I would say, roughly about a year ago, not even a year ago. And we have secured several contract wins in this product line already, okay? I'm not able to talk about the details because of the sensitivity of this product, but we have done that.

We launched LOCUST X3, on my right again, just this year. And we're continuing to improve and upgrade, and Rob is going to cover this in more detail in some of his remarks and presentations later today.

So investing in R&D, having a fast speed to market and doing it ahead of our customers and investing heavily in here in a judicious way is a critical part of our strategy and it's intentional and has proven to deliver results for us time and time and time over and over again, okay? There's lots of examples here. You could see the JUMP 20, JUMP 20-X. You also see our LOCUST systems, our AV_Halo, Halo_Shield for the Golden Dome initiative, our P550, the Group 2 drone that I mentioned on the left side. And then our Titan 4, which is, again, we're on our fourth generation product for Titan, the counter-UAS jamming solution that's sitting on my right again as well there.

Okay. So leading with innovation for us really is one of the critical part, and capacity is another part of the critical component of the strategy. But other than that, I also want to mention, let's talk about a little bit of the future, the strategic priorities. What are the strategic -- what is the strategic plan and what's our priority in terms of how do we go do that? And how can we simplify that to our investors so they can understand it really well?

And it's got 3 key pillars, 3 key pillars. If there's one thing I want you to remember about our strategy for the future, it's got 3 things. First, lead with innovation; second is capture the growth; and then third is execute with excellence.

And execute -- so first is, are we focused on the right markets with leading capabilities and offerings that addresses our customers' needs? Are we uniquely qualified to be able to compete and win? That's one. That's why we invest in R&D. That's why we invest in capacity. That's why we have the world's biggest capacity in these categories that you see today. That's why we have an installed base that is unmatched in the industry. We keep building on that momentum. And that keeps -- make it set us apart from our competitors.

Second is then that allows us and positions us to be able to capture the growth. And what are those growth opportunities? Church is going to walk you through that in more detail in a few minutes.

And then lastly, as we capture the opportunities with the market-leading innovation and products, can we deliver and execute on that? And Rob is going to cover that for you. How do we do that? What are the secret sauce for AV that sets us apart and uniquely positions us to be able to do that? So those are the 3 key pieces of our strategy.

Let me walk you through 3 of these in a little bit more detail. I mentioned about leading with innovation, right? This picture just tells the story itself. Look at the solution sets that we have launched to the market just in the last 12 to 24 months alone, alone, right? I don't think you're going to find another company in the market -- in the entire market that we serve that has this type of a market-leading solution set that's innovative, that is relevant to the conflicts and it meets the highest priorities of our customers. That is very unique to AV.

And let me also remind you of something else. These are not prototype products that we're in the development today. These are products that are relevant to the complex. We produce them, majority of them today in full rate production. They are fielded and they're on second, third, even fourth generation iteration of innovation and products to the market. So we know how to do this. These are not unproven capabilities.

That's very unique to us. It's not about what we could be. It's what we have already done. And we're just repeating -- rinse and repeat the same strategy and the same recipe that we've had. And it gives us a huge advantage in the market because when customers look at us and they assess us, they recognize there's a huge difference in the amount of risk they would take by selecting AV. And that's part of the deliberate strategy of making sure that we have an advantage in this area, not in terms of time to market so we can develop solutions fast, not just because we invest a lot, that's also unique to us relative to the market, but also that they know that if they select AV, we can deliver, and we have delivered. And that's very unique to AV.

Second is capturing the growth, okay? This -- you know about this more than I do because you understand this industry incredibly well. It's not a secret that investments in global defense is going to continue to grow at a fairly, fairly fast pace. The U.S. Department of War just submitted a proposal or a budget that is up 74% roughly. And it's not proved yet -- approved yet. And it may not end up being a 74% increase year-over-year. But whatever the number is going to be, it's going to be a significant increase. It's most likely going to be well over 10% to 20% growth just the next year, government fiscal year, right? And the same thing is true across the entire globe.

Not only that, we're in the categories that are growing faster than even the market. We're in the categories that's relevant to our customers' needs globally, not just domestically, globally. So is there growth in this market? You bet there is. Are we positioned effectively against that growth? There's no question. There's literally no question in my view. Is our portfolio optimized to capture that growth? I showed you the solution sets, you already saw that, okay? It didn't get there by accident. We have deliberately invested in these categories to get to the position that we're in today.

And then lastly, I want to say about this growth is also that we have a deliberate intent to this year and the next 3 years to aggressively increase our presence in the international markets. Not only do we have that intent, but our customers are asking us. They want us to be more intimate and closer to them geographically in these markets. And it's going to be a significant part of our growth strategy, and you'll see that covered more with Church and Rob in the next few sessions today.

And then lastly, our SOM, not SAM, not TAM, which is the smallest subset of those 3, is expected to grow about 18% CAGR, okay? So that's a pretty industry-leading growth rates for the market. And we'll give you more details as to what our expectations are and our plans and what we expect to grow and what our targets are for us ourselves.

Okay. So the next thing is the third piece of that growth strategy is executing with excellence, okay? We have announced over the last several years, 2 years, at least let's go back just 2 years, capacity expansions in several of our facilities. We've put capital down to expand production of Switchblade, of P550, of our Titan series, of our LOCUST systems that are happening right now, okay, our one-way attack drones. All of that has been deliberate to make sure that we capture the growth and we can execute and deliver on our customers' expectations.

And it sets AV uniquely apart because when customers says, "Can you produce these now because I've got needs?" One company that stands out again and again and again is AV. It stands out. We are the one that produce these things by the thousands now. Not next year, not the year after. We're doing it today. And we are investing in that capacity to be able to double, triple, quadruple, in some cases, increase that capacity by 10x over the next 2 to 4 years, okay? And that allows us to be positioned for the opportunities and for the needs that our customers, we anticipate that they're going to have.

And we also judiciously do this across not one site, multiple sites. We announced the site in Salt Lake City, AV Frontier. That is going to be operational towards the beginning of this next calendar year -- end of this calendar year, beginning of next calendar year. That adds just that facility alone, which roughly -- Sean is going to walk you through it, about $60 million, $65 million worth of investments is going to give us $2 billion worth of production capacity for our Switchblade family of products, and we can also make other products in that facility.

So these are the examples of how we judiciously place bets and invest in areas that we believe is going to improve our odds to deliver and execute on our customers' needs and the demand that we expect in the market that's out there.

Okay. With that, I want to take a minute to introduce Church Hutton, who is our Chief Growth Officer. Church has been with us now for 3-plus years. He's an industry veteran. Some of you have known him for many years. And he's going to walk you through those 3 investment theses that we talked about is that how do we capture the growth. Church?

Sir, thank you very much. Good morning. I'm Church Hutton. I've been in this role as Chief Growth Officer for about a year now. I've been with the company, as Wahid said, for about 3 years.

Wahid talked to you about our industry market CAGR, what we're seeing from a SOM perspective, what we're seeing in terms of defense, domestic and international budget growth. So I'm going to tell you how we are going to achieve our piece of that, how we're going to 2x our business over the course of the '27 through '30 period.

There are 3 pieces to it. The first is products, the second is customers and the third is winning program offerings.

Products. As Wahid said, we have more than 20 products either in production now or in development, getting ready for production, tested, fielded, combat-proven systems. We provide those products into a distributed installed customer base with whom we have had long-standing relationships sometimes for decades. Those products are able to be used by multiple adjacent customers where we have market entry into a single customer, the Army for a new product and then applicability into the Air Force, into the Navy, into the international customer base. That installed customer base is incredible leverage for us as we iterate and generate new products at a relatively high cyclic rate.

And the third piece is our positioning to win programs. Let's talk about products first. What you see here is a set of large dollar awards in the last 12 months for franchise programs as well as new offerings and new entrants into the market where we are seeing incredible customer commitment.

Starting on the left, P550. Wahid talked to you about the win for Army long-range reconnaissance, $117 million announced recently. That is our initial customer, our anchor customer for that product with applicability across multiples.

Switchblade 600, of course, won a recent $186 million task order on our lethal unmanned systems directed requirement contract, continues to be a mainstay for AV.

On the bottom left, JUMP 20, won a competitive spot on the Navy's broad agency announcement for contractor-owned, contractor-operated ISR. And that built on an earlier foundation of multiple programs of record in Europe. We see domestic and international demand for this very, very strong.

Red Dragon, we have our first public award of this one-way attack capability to the Army, $17 million in the last 6 months. The LOCUST Laser Weapon System has now been cleared safe for use domestically by the Federal Aviation Administration and cleared for export by the State Department. Very exciting, of course. That product is competing. We are competing in that product for the Army's Enduring-High Energy Laser potentially $0.5 billion competitive award.

The Titan system, RF, radio frequency counter-UAS jamming system has had a fantastic FY '26 and will FY '27. You saw last week the announcement from the Joint Interagency Task Force of a $500 million sole-source IDIQ for RF counter-UAS. We're supporting there with our Titan system. And we've already received the first delivery order earlier this week, $81 million for that, with line of sight to the next delivery order.

Laser communications, now we get into some sensitive territory, but enormous win, more than $350 million, almost $400 million in the last fiscal year, with incredible capability and opportunity as we move forward through the period. We continue to win large, often sole-source IDIQ advanced research and development awards. HELMSSMAN is one particular example from the Air Force Research Laboratory. And a set of other new offerings and products: Switchblade 400 for the Army's LASSO program, that's the Low Altitude Stalking, Strike Ordinance program for the Army; and FE-1, Freedom Eagle-1, which Wahid mentioned, competitively selected against long-standing incumbents to provide a new counter-UAS missile. The Army calls it the Long-Range Kinetic Intercept program. You are looking at now the newest missile maker for the U.S. Department of War. Those products are provided by AV into a distributed customer base across all of the services, federal and state agencies in the U.S. and to 55 or more countries internationally.

What you -- what I'd like to point out on this slide is that you see the same products being provided to multiple customers. Those customer relationships allows us to penetrate those same customers with new product offerings on a regular basis because we have that installed base. That's critical for us. You can see Titan, right, across the board, JUMP 20s, Switchblades, Puma's, our AV_Halo common control software, multiple customers.

And then as you look at new program offerings, new product offerings, including P550, including LOCUST, including Freedom Eagle-1, we have new opportunities to begin with an anchor customer and grow into adjacent customers. That distributed installed customer base is critical to us. We've had a great deal of success and expect much more.

On the international front, the geostrategic environment continues to be dynamic. In Europe, they are positioning themselves for a deterrence such as we haven't seen since the Cold War. In Latin America, the Counter Narcoterrorism program continues with our southern neighbors and allies. In the Middle East, they are rebuilding a set of defensive capabilities that was exposed 4, 5 months ago in Operation Urgent Fury, and there's a strong demand for defensive systems. In the Asia Pacific, our allies and partners there are reinforcing their force structure in the face of a rising China.

And so from all of those key regions, we see strong demand for counter-UAS, for strike, for long-range multi-mission ISR. These are our core categories. We have a distributed, installed customer base with 55 countries that we have sold to with whom we have relationships. And in FY '26, more than $500 million in sales. We are working with customers we know, relationships that we have, products that they need to solve problems that are their highest priorities.

Pivoting from customers to programs. We think about budgets. I came from the DC budget and oversight world in Congress way back when, and I think about budgets first and foremost. And what we see across our international and domestic customers is significant growth in top line budgets, but also in our 4 categories very specifically. So as you look at the serviceable, addressable markets within our key categories, you see double growth over the course of the period, right, through FY '30. That gives us the opportunity to double our business as well as we provide those key products into those customers.

How are we going to do it? How are we going to realize this growth? So you see here our 4 categories. You see the products that are aligned against those categories. You see a wide variety of customers. And you see the specific programs that we have line of sight to and many more. This is a finite list of a much larger -- a finite subset of a much larger list. Key programs that we'll be competing for over the FY '27 to FY '30 period. And those programs represent, in total, more than $35 billion of opportunity for us to compete and win with our products.

I'll talk about just a couple of them quickly. Across the Army, the Navy and the Marine Corps, strong demand unmanned programs for medium-range and long-range UAS. As we are delivering here with P550, you know about JUMP 20-X.

In the strike category, we're competing for Army-launched effects. We're competing for the Army's LASSO program. We're competing or will be competing for the next iteration of the Marine Corps' Organic Precision Fires effort. And the Department of War has now stood up a DRPM, a Direct Reporting Portfolio Manager, for uncrewed systems. That person hasn't been named yet. There's an acting person there. And they are the funnel through which a lot of new DoD spending will be accelerated in the UAS space, both for multi-mission ISR and for strike. And so they have initiatives underway as well. Of course, those initiatives are not quite as well detailed in normal Department of War justification documents -- budget justification documents. But we're very close to those operators. We understand what we're looking at there, and the opportunities are significant.

On the counter-UAS side, we already talked about LOCUST competing for the Army's Enduring-High Energy Laser program. That's a big one. The Army's Long-Range Kinetic Interceptor effort, which is Freedom Eagle-1 already competed for and won there in developmental test has a massive opportunity over the course of the period.

Both the Marine Corps and SOCOM and DHS and others all have counter-UAS initiatives, which we are competing for and winning, first with our Titan family, soon with our LOCUST Laser Weapon System. And on the space and advanced technology side, much of this gets into sensitive and classified territory, but the opportunities for long-haul laser communications, other space components is large.

In total, again, we expect to be competing for opportunities worth a total of up to $35 billion or more over the period. It's an incredible opportunity for us. We're very excited about it.

So I'll go back to the -- where I started. Trusted products, more than 20 in production or entering production, that are combat-proven, fielded and new products coming online at a high rate of speed, being provided into an installed, distributed customer base, customers with whom we have enduring relationships, understand their needs and are capable of providing these products into -- and cross-selling into new adjacent customers and positioning ourselves to compete and win for programs with a total opportunity value of up to $35 billion or more over the period. Our products are fit for the needs of the war fighter today and going forward, and we expect this to drive between 15% and 20% organic growth over the period.

So with that, I will transition and introduce Dr. Rob Smith, my newest colleague and our Chief Operating Officer.

Thank you. Good morning. How is everyone doing? Well, Wahid was able to talk about our strategy and what we're doing there. And then Church came and talked a lot about our growth, the markets and how we're going to get to that $4 billion 2030 marker that we put out there. Now I'm going to talk a little bit about -- initially, I'm going to talk about -- a little bit more about the segments. I'm not going to spend a lot of time on that as Wahid obviously hit the products, hit the companies. I'll just talk a little bit there. But really, the focus on mind is how we are going to scale, the investments that we're going to put into manufacturing and into IRAD to be able to get that additional capacity that we need because the demand is going to be there and we need to be ready for it.

Okay. So we have an amazing market position, as Wahid said. And we need to leverage that position and continue to drive synergies. And what do I mean by that? We have a $2 billion enterprise approximately and we are bringing best practices across the whole enterprise. And that includes our ERP system, that includes what we're doing for our MRP. That includes what we're bringing to autonomy. We can -- to deliver something once and then we can push it across all of our business. And that's really powerful because that drives down the price of what it costs to do the development as well as what it makes to actually produce the product once we produce it.

I think what most of you are probably interested in for me talking about is the scaling for future growth. I'm going to talk about our investments in capital. I'm going to give you some numbers. I'm going to talk about the facilities that we are investing in. And I'm going to also talk about -- a little bit about our IRAD and kind of what we think about how we're investing our IRAD both in new products and new capabilities as well as in continuing to enhance our current products. Like Wahid talked about, we're in the second, third, fourth generation of our products. We're going to continue to invest in our current products to keep them relevant and keep growing market share.

Okay. We go to market in 2 segments, as I suspect many of you know, but we're one AV and that's the way we think about it. We have products across the company, and we're about $1.4 billion in revenue in the Autonomous Systems and $600 million in Space, Cyber and Directed Energy. In our Autonomous Systems business, we go to market or we report in 3 segments or 3 subsegments, the precision, strike and defensive systems. So think of this as the loitering munitions, the one-way attack and 2 of our 3 counter-UAS products. The Freedom Eagle, the missile, is in that business as well as our RF Titan system. The LOCUST system is actually in Space, Cyber & Directed Energy.

I should also make a point that I've heard, as I've talked to investors as I've been in the role for about 3 months, that they equate Space, Cyber & Directed Energy to heritage BlueHalo and they equate Autonomous Systems to heritage AV. And I just wanted to make sure you all recognize that that's not right. There have been products, as a matter of fact, both of the counter-UAS products that are now in our AxS segment came from the BlueHalo acquisition.

So over on the Space, Cyber & Directed Energy, again, Wahid talked about this, just the Space and the Directed Energy. Let me just say something about the Directed Energy. I think you're all probably aware of this, but I think it's worth highlighting. We are the most battle-tested directed energy product in the world. No question.

We have been -- we have deployed operationally. And we've also been tested through both the Navy as well as in white sands with the Army. And for those that don't know, when you're on a Navy platform, we were on the USS George Bush with 100% success rate with the -- what the Navy threw at us for threats. That is a hard environment. The boat is moving and you have to have a really sophisticated system to be able to track and pinpoint and be able to destroy threats. And we were 100%. That is amazing. I don't know of any other company that's been able to do that.

So we have a layered system for counter-UAS. And so you've got the RF, then you've got the lasers and then you've got kinetic. We have it all. And it's all tied together through our Halo software that has C2, autonomy, automatic target recognition, just a very impressive capability for our counter-UAS.

A little bit more about Autonomous Systems, AxS. I already mentioned, it's about $1.4 billion in revenue, 42,000 platforms fielded. Think about that. Again, I don't know any other company that can talk to that kind of scope and scale. And Church also mentioned it. He talked about we have established customer relationships, we've got products that are out there. And the key is going to be scaling up our manufacturing and continuing to develop our products to be able to capture this massive growth that we have in our markets.

The only other piece that maybe I'll talk about, maybe 2 other quick things, the market is huge. Church talked about the market, I want to highlight it here about a $32 billion SOM, $30 billion. We're at $1.4 billion. So there's plenty of opportunity for us to grow and take market share with our products.

Additionally, I would say there's a lot of room for a lot of winners in this market. We have 22% growth on that SOM, 22%. That's a nice tailwind for a company like us who has leading products in these market segments deploying today.

You see a number of large-scale program opportunities there. Those are a mix of things that we want, like at the bottom where you see the Titan, the JIATF-401 domestic shield. You probably saw that IDIQ was awarded with an $80.5 million initial task order. Again, just customers showing us by giving us critical programs where we're sitting in the market.

And then there's ones that we're competing for, like the U.S. Marine Corps OPF program. That's been pre-RFP, so we're shaping that RFIs and looking forward to that award. And then the others are a mix of ones that we've already won or ones that were multiple awardees on a contract and potential down-selects in the future.

Space, Cyber & Directed Energy, about a $600 million business, a little bit smaller SOM, call it, $20 million. Still 12%. When you look at versus the AxS segment, you might say, well, that's not -- the AxS segment has grown more. But still, that's double-digit growth. That's a significant growth for us.

Wahid talked about BADGER. I talked about LOCUST. We can't say too much about our cyber solutions business. But I just -- this biological and nanoscale, we do a lot there. And I don't -- we don't usually talk about it as much, but we won a $499 million IDIQ 10 years. Church mentioned HELMSSMAN. That is viewing advanced materials to protect critical products and infrastructure from -- in contested environments. We can't talk too much about it in detail, but it's really great technology, some that we would expect to get to, I'm going to call it, commercialization where we're actually producing these. And that's one of the products that Wahid said in that space, over the years, you're likely going to see other products come out that we're going to have. That's one of -- and there's some others as well. So we're investing in a few key strategic areas and places where we can commercialize to capture that growth.

The biologic and nanoscale, the element, that's actually also pretty interesting. That is -- think of it as an ink that has -- it's highly conductive that you can -- that is very adhesive that you can print, so you can put it into clothes, you can put it into other devices and get -- do a lot of important things for our customers.

So I love the way our Space, Cyber & Directed Energy business is positioned. And what we're doing in the cyber mission solutions, as Wahid said, makes a difference to our war fighter and really makes a difference and protects citizens. And it's a great business where there's a lot of cash on cash, quick recovery cycle. So I think it's really good. And it brings a lot of capabilities.

The other thing, Wahid talked about our capabilities and talked about it more from a vertical of our products. I'm going to talk about it a little bit different just so I can give you a different flavor. I want to talk about it from the domains that we're in.

Our company, we're in space, we're in air, we're in ground, we're in marine and we're in subsurface. We're in cyber, we're in EW. All of those capabilities coming together is what makes us such a powerful company because we have all the capabilities resident within our business, within our company to be able to provide solutions to customers.

We were recently at Jailbreak and that's the Army -- if you don't know, the Army put that on. And it was about interoperable solutions across the different Army platforms. We were there and we showed we can interoperate with many of our competitors. We -- Jailbreak, it's breaking the systems open to be able to work across the platform so that the war fighter gets what they need. We were able to show that we could work with other providers and our solutions are interoperable. And that's something you're going to see later, I'll talk a little more about. We're going to continue to invest in that interoperability. It's really important for our customers. Okay. So now I'm going to talk a little bit more about what we're doing to get the synergies across the business.

Shared resources. This is what I was talking about earlier. This is having a single ERP system, enterprise research planning system. This is having a purchasing system. This is looking at our supply chain, and I'm going to talk more about our supply chain. I'm going to have a slide on it, so I'm going to give you a little bit more detail on our supply chain. But this is taking our supply chain and bringing it and optimizing it so for the scale-up. Some of that means we want to have less suppliers and bring that number down, so we have more leverage with and can get bulk buys. And in some cases, we want to do multisource and dual-source. So we have a strategy around that and I'll talk to you a little bit more about that.

It's also when we have these systems that are across our whole business, we're able to develop something once and deploy it across the enterprise, whether that's some type of automation, whether that's some type of an AI tool, you pick it. So we're spending a lot of time bringing best practices -- manufacturing best practices across our company and all of our facilities.

Interoperable solutions, this is what I was mentioning earlier. Taking our products and making sure that they can interoperate with one another and provide a solution to a customer and operate with other companies' products and then operate with us. For example, if a customer has AV_Halo deployed, we want to be able to have other products so that the customers get a unified picture. We are all in on that as a company. It's what the customers want, that's what the customers need and that's what we're doing.

Unified technology. This is either put IRAD in and create something that can then be used across the board. And it's also qualification. A lot of our products go -- have to be heavily qual-ed. So if we can qual a product, a battery, a sensor, a subsystem one time and then use it across the whole enterprise, that is a very, very powerful thing to do, and we're spending a lot of time looking at doing that. Scott Bowman, our CTO, has done a fantastic job with a strategy around making sure that we have technology that we're investing in and then that technology being deployed out across and spending maybe a little bit more money upfront to develop that technology. So it has a little bit -- it has enhanced capabilities so that it can be the product that goes into many of -- our subproduct that goes into many of our products.

Okay. Now this is what I suspected many of you wanted to talk about. So we're here next couple of slides. So how are we going to get this growth? So Sean will talk more about it, but we've said $4 billion in 2030. Wahid showed you the strategy and how we're positioned, where we need to be in the right markets. Church talked about the massive -- there's total market value and the growth associated with that. So if you believe that the demand is going to be there and we're in the right markets, and I think it's hard to not believe that we're in the right markets and the demand is going to be there, then how we have to scale up? Well, it's -- for the scale-up of the manufacturing, it's really 2 pieces. The first piece is the investment in CapEx. The second piece is the investment in the supply chain and the supply chain strategy. And then the third piece is the IRAD and what we're going to do there. And that's the next 3 charts that I have, and then I'll get off the stage.

The way I think about our investment in CapEx, I think about it from a facility standpoint and then maybe you might call it an equipment standpoint. So facilities, think of that as buildings, AC, water, power, everything you need to have the facilities infrastructure to be able to support your manufacturing. We're going to spend $65 million about this year across the facility. I should also note that you'll see some different numbers when Sean briefs because this is -- I am focused solely on what we are spending in order to capitalize on production growth. Sean has others in there, which -- other more maintenance capital and consolidations and things that we're doing. And here, we'll talk more about that.

$65 million, Albuquerque, New Mexico, $25 million. That's predominantly laser weapon system, also a little bit of space. Salt Lake City, Wahid talked about that. That's going to be for the Switchblade. That's a massive $20 million investment to be able to scale up to about $2 billion of additional capacity. And then Huntsville is the Freedom Eagle predominantly. So that's in our budget. That's -- and I will say also that with our expenditures, we are on target and on budget and on time. And -- that might surprise some of you, especially when you think about Salt Lake City, which will be done by the end of the year and then we'll be able to produce next year in that facility. I don't know many of you how many -- many of you have seen capital projects. They are typically late and over budget. We're not. And I'm really proud of our execution and what the team has been able to do there. And then we've got $10 million, some other smaller sites with some of our other products. So that's a $65 million in CapEx that we're going to spend.

Then the other piece of it is facilitizing it. So think of this as production equipment and supporting to be able to actually bring the line up to produce the products. We're going to spend about $60 million on our strike portfolio. Wahid talked about the products that are in there, and that's about $2 billion of additional capacity at -- looking at it from a revenue perspective.

Multi-mission ISR, we're going to spend about $50 million, and that will give us $1 billion of additional capacity. And then the counter-UAS and our other products, about $20 million for a total spend of $130 million. This is $4 billion of manufacturing capacity that we're investing in today.

And we've got to do this. The customers today, it's not like it used to be, where a customer will put you under contract and say, "Hey, deliver me this 2 years from now." It doesn't work. We have to have many times a prototype. We have to demonstrate that it can work and then a customer will fund you to be able to continue. And so for us, it's critical that we get this capacity because the demand is going to be there. And if we wait, the market will pass us by. And that's what Wahid said and I'm just foot-stomping it.

Okay, supply chain. So what -- my message on the prior slide was we funded and are investing and executing on the capacity that we need at AV to be able to get to a $4 billion of additional capacity. Now I'm going to say the other piece of it is supply chain. As you know, we spend a lot in the supply chain. Supply chain is very important. So what are we doing there? Today, we have about 1,400 suppliers. A year ago, it was over 3,000. So the team has done a fantastic job getting the number of suppliers down. 1,400 is still too many. So we're still going to look to where we have very small suppliers, how we can bring those together to be able to have more buying power and be able to buy in bulk to get better pricing. Well, on the other -- and 92% right now of our parts are dual source, meaning we have at least 2, maybe more suppliers that we can go to. That's on a parts number.

We have some high-value parts that are still sole source that we're looking for a strategy around -- what are we going to do there? In some cases, we will dual source those. In other cases, we are working long-term agreements, and we may do both. We may have long-term agreements and sole source. But the long-term agreements, we're working with our large vendors that are doing high value and putting long-term agreements in place and negotiating them that says, here's what our demand is going to be, here's what we need you to facilitize for. They get some assurances of buying at scale in the future so that they will invest. And at the same time, we get some price stability and pricing out. So we're in negotiations to do that. And that's going to be really important over the next couple of years.

98% NDAA compliant meaning made in the U.S. So it's a little bit of a bifurcated strategy. It's continued to consolidate on the -- more of the commodity small-scale side and then it's sole source, where we we're sole sourced, look at those long-term agreements and potential other dual-source initiatives. This should expand our margins, increase our supply chain agility and really optimize the supplier base. So this is a big focus. And I'm really proud of the progress we've made and the progress that we're going to make over the next year.

Okay. IRAD. We're going to spend -- we guided 7% to 9% of sales for IRAD, and that is our plan. We are going to be investing in IRAD across our space. So we have investments planned for multi-mission ISR, strike, counter-UAS, space and advanced tech as well as Halo, which again, that's our -- you call it, our C2 system that brings it all together that Wahid talked about. We're balancing our IRAD between new capabilities and new technologies, along with investing in our current products to make sure that they remain viable and we grow market share. You can think of things in that category like enhanced capability, integration of a new sensor, integration of a better battery, what have you. You can think of that as we need a prototype so that we can demo it.

So customers can see it, so they will fund it and buy it for both LRIP and full-rate production. And you can think of that as looking at -- and I mentioned this earlier, just reiterating it, investing in core technologies or subsystems that can then be used across our broad portfolio. So a really important part of what we do. And again, Wahid said it, just the success. And I know 7% to 9% is a lot of IRAD, but our success rate in turning IRAD into products and into revenue is unmatched. So -- and this will be no different. We've looked at the IRAD. We have a strategy around the IRAD. We're continuing to refine business cases, and we'll continue to make the capital allocation decisions to maximize the IRAD that we're spending for the markets and the returns to our shareholders.

So with that, I would just like to say we're in a great position to be able to -- we're in the right markets, we have the right products. We're across all of the different domains. We have the investments. We're very fortunate to be such as strong company, to have the financial flexibility, to be able to scale today for our future growth and to be able to invest in our facilities, in our supply chain as well as in our products and capabilities and with the IRAD to be able to leverage on that.

So really excited about the future. I look forward to taking your questions later on in the day, and in the future, being able to come up and talk to you about the successes that we've had across the portfolio. And I'm sure you'll be reading a lot of them in the news or talking to Denise and others or Wahid or me about it in future investor conferences.

So I'd like to say thanks. I am so excited to be part of this company and this leadership team. For those who don't know, I've been here about 3 months. I mean I was impressed with the interview process and what I knew publicly. And now that I'm on the leadership team and being able to see it first hand, there's not one place where I went, oh, my gosh, I just got more and more juice and excited about what we're going to do for our customers, the war fighter, for our employees as well as for our shareholders. So thank you very much. I look forward to taking your questions in the future.

At this point, we're going to take a 15-minute break. And then the star of the show is going to come up, who is Sean, who's going to give the financial overview and take what Wahid, Church and I said, and then put that into numbers for you, so you can get a sense of what we're thinking over the next couple of years. Thank you.

[Break]

[Presentation]

Welcome back, everybody. It is now my pleasure to introduce you to our CFO, Sean Woodward.

Thank you. Good morning, everyone. I'm Sean Woodward. I am the Chief Financial Officer. Recently stepped into the role effective May 1 of this year, but I've been with the company for over 16 years. So I know the insides and outs of this company. I've been around for quite a long time.

Before I dive into my slides, I want to first kind of recap what we've heard so far this morning. Wahid came up and discussed kind of what the company is, what we've been doing, what we've been focused on these last 2 years since our prior Investor Day. He talked about the markets that we're in, the products that we offer and our growth expectations.

Church then came up and talked about our customers, our products and the programs that we're focused on, all-in areas are expected to grow with a doubling of our SOM over the next 4 years. Rob discussed how we're going to execute with excellence and the investments we're going to be making in research and development and CapEx that are going to allow us to achieve that growth rate.

I'm going to bring it all together and talk about how that translates into our financials and what we expect from a financial return from now through fiscal year '30.

I view my primary role as the CFO is adding value to our shareholders. We do that based on 3 key foundations. First, investing in research and development above industry peers, staying ahead of the competition and ahead of emerging threats. Next, targeting that investment into high-growth markets, placing our bets on where the highest priorities are for our customers' needs, developing solutions in advance of their requirements and bringing those solutions to a scalable production. Third, executing with excellence utilizing our proven business model of developing technology, commercializing the intellectual property and selling that across our installed base has been a proven business model that we've had for years. And we plan on continuing to do that to improve our overall profitability.

Recapping the slide that was presented earlier by Wahid, our track record of making bets and investments is unmatched in the industry. We're able to predict exactly what is needed from a customer's perspective in advance of the need. We've invested in key technologies that has allowed us to be in winning positions in all the markets that we operate in. Those investments are critical in anticipation of current demand and future demand over the years to come.

Rob mentioned the investments we're making in CapEx. We provided some visibility on this in our call last week on our earnings call. We guided between 12% and 14% of investments in CapEx in fiscal year '27. That is a significant amount of CapEx. We have not spent nearly $300 million in CapEx before. Our company, in general, is not a capital-intensive type of company. We see the demand coming and we are expecting to scale to meet that demand.

The investments we're making are in key 4 critical areas. We're investing and building out our Salt Lake facility in Utah that is to support our Switchblade product line. We're investing in our Albuquerque, New Mexico facility to ramp up production of our LOCUST Directed Energy Solutions. We're further expanding in Huntsville, Alabama for our kinetic counter-UAS interceptor missile program to meet the customers' requirements there. And additionally, we're expanding in our Northern and Southern California facilities to support our UAS and counter-UAS RF capabilities.

These capital expansions, we expect to be in fiscal year '27 to add $4 billion of incremental additional revenue capacity. We anticipate the capital levels to return to more historical levels post fiscal year '27. It's a near-term injection of capital into our facilities and our infrastructure.

In addition to the facilities build-out and the production equipment build-out, we're also investing in our IT infrastructure, ERP and MRP systems. We've picked and selected world-class cloud providers of all the key systems to be able to scale with our business and further allow us to integrate M&A activities much quicker and easier, into robust systems that are constantly updated and staying current and modern.

It's important to note that within the CapEx expenditures next year, our real estate purchase that we plan on making. In key markets where we have been for many decades and we plan on staying for many decades,and customized facilities to meet our production requirements, we plan on purchasing real estate, which is included in the figures shown in our guidance.

With that, I'm excited to go through our fiscal year 2030 targets and our framework for where we expect our growth to be. First, I want to recap where we ended fiscal year '26, provide an update on our fiscal year '27 guidance and then we'll talk about fiscal year '30 targets.

Fiscal year '26 was a remarkable year. We had nearly $2 billion of revenue. We ended the year with $2.7 billion of total backlog. We contributed 6% to R&D investment. And we ended the year with 14.5% adjusted EBITDA margins. During the call last week, we provided guidance to fiscal year '27. With that, we're expecting top line growth to be 10% at the midpoint of our range. That 10% excludes any revenues related to our SCAR BADGER program. It also excludes any revenues related to incremental additional Ukraine. Those have been removed from our plan, and we're still growing at 10%.

We've increased the investment in research and development with a guidance of 7% to 9%, which reflects a $50 million increase in the dollars focused on research and development. We're doing that by delivering a $305 million to $325 million of adjusted EBITDA. Those investments we're making in fiscal year '27 from a research and development and from a CapEx perspective are going to allow us to scale to our 2030 targets.

2030, we're expecting revenues to grow at a compound rate between 15% and 20%. That essentially doubles our revenue from fiscal year '26 actuals. We're doing that while maintaining between 7% and 9% of research and development throughout the planning years. Further, we're expecting our adjusted EBITDA to improve to 18% to 20% by the end of the decade. That's a 350 to 550 basis point improvement from where we ended fiscal year '26.

Where that revenue is going to be coming from? We've broken down on the chart here. Ending at $2 billion and expecting to go to $4 billion is a significant increase in overall revenues. Looking at our operating groups and how we report our financials, the first one is our Precision Strike & Defensive Systems Group. This business just ended quarter 4 of fiscal year '26 with an 80% year-over-year growth rate. We're not expecting 80% continued in the future, but we are expecting between 15% and 20% growth rate in Precision Strike & Defensive Systems. It is our largest business, so the growth rate of 15% to 20% adds significant amount of revenue dollars over the planning period.

Our next operating group is our Space & Directed Energy business. While a smaller starting point than the Precision Strike, it is expected to grow at a higher rate, between 29% and 33%, led by our LOCUST systems in Directed Energy.

Next is our UAS business. This is our Group 1 through 3 platforms as well as our common controller. We're expecting that growth rate between 13% and 19% over the planning years, led by our P550, our JUMP 20-X and our common control capabilities.

Next, our Cyber & Mission Systems business is expected to grow at a more modest 7% to 10% after seeing improvements in fiscal year '27 versus fiscal year '26 results. These cyber and intel services provide critical infrastructure and services to our most important intelligence agencies.

Finally, in the other categories, this is what rounds out our all-domain solutions. This is our ground robot and our UUV business, our underwater vehicles, expected to grow between 8% and 11% over the planning period. In total, that takes us to a $3.5 billion to $4 billion revenue range by fiscal year '30 or a 15% to 20% growth on a compound annual growth rate.

In terms of the improvements that we're expecting on adjusted EBITDA, we have 4 main focuses that we're keyed on to improve the overall percentage as well as dollar value. Going from $286 million ending in fiscal year '26 up to $630 million to $800 million is also a significant increase in overall profitability for the company. That's going to come through 4 things. First, organic revenue growth. As the business doubles in size, we're going to add significant amount of additional adjusted EBITDA, purely by the size of the revenues that are coming into the company.

Second is the mix or the margin improvement. We're expecting to increase our overall product-related sales, increase our international and commercial related sales as a percentage of the total, increase our firm fixed price contracts versus cost-type contracts and utilize some operating leverage on our SG&A from the investments we're making in our IT business systems. We're doing this with the assumption that we maintain between 7% and 9% in research and development across the years.

Finally, the capital investments that we're making, we're expecting that to improve our overall utilizations, the throughput and the volume and the yields on our new production capabilities over the next 4 years. These investments that we're making and the focus on our adjusted EBITDA should expand us 350 to 550 basis points over the planning period.

In summary, the value that we're adding to our shareholders is based on these 3 foundations: investing above industry level rates in research and development, focusing that R&D dollars on high-growth markets, our SOM is doubling in size over the next 4 years and we have bets on all of those key technologies currently developed, currently won and expected to win in the future. And finally, executing with excellence. Improving the overall mix of our business, bringing more products to the market, distributing those across our installed base and improving the overall mix of products versus services will improve our adjusted EBITDA by 350 to 550 basis points by the end of the decade.

With that, I think we'll turn it over to the Q&A session.

Okay. Thank you, Sean. Thank you, all the presenters, AV leadership team. Now it's time for us to have the Q&A session. I want to ask our leadership team to come to the stage. And we'll -- obviously, we'll take your questions as you go. Why don't you guys come over through here and grab a seat here and here?

You met a few of our members. You've met a couple of other members of our key teams. Trace Stevenson, who is the President of our AxS or Autonomous Systems segment. He's been with the company for well over -- how many, 16-plus years?

22.

22 years. He looks very young, but don't be deceived. And then, of course, Mary. Mary has been with the company, and she's the President of our Space & Cyber business and Directed Energy. And she came to AV as part of the BlueHalo team and has been with the firm since the inception of BlueHalo, to my knowledge, roughly. But in 20-plus years of -- yes, experience in the industry.

Let's just turn it into Q&A. I think, Ken, you had your hand up first. And I'm going to try to take the questions and also toss it to our team members who could actually best answer it for you.

Great. Thanks, Wahid. Yes, Ken Herbert with RBC Capital Markets. Maybe for Wahid or Sean, in particular, appreciate the margin expansion path you just outlined. The '27 guide, maybe there's some conservatism there, but implies sort of flattish margins over '26. So clearly, '28, '29, '30 is where you see the ramp. If you're holding R&D sort of flat, maybe get a little CapEx relief, can you provide a little bit more detail on either mix or sort of the volume and the absorption benefits and how we think about or should think about the margin ramp '28, '29, '30 because it implies a pretty significant step-up over those 3 years?

Sure. Yes. Thanks, Ken, for the question. Yes, we're expecting to see our adjusted gross margins to improve over the years. As we increase the overall product-related mix versus services, more fixed-price commercial terms, expanding commercially and internationally versus domestically, all those are drivers to improve gross margins and we're expecting it to ramp throughout the years. So that will end fiscal year '30 at that 18% to 20% of adjusted EBITDA.

We're also expecting the operating leverage -- the investments we're making in our IT infrastructure is going to allow us to scale with a smaller overall team. We're not going to have to spend as much on SG&A.

As you mentioned, fiscal year '27 adjusted EBITDA is expected to be flat essentially year-over-year. And that's because we're incrementally increasing in research and development. We're also increasing in SG&A as we see the international markets and domestic markets growing rapidly. We're going to make those investments to yield the future growth over fiscal years '28 through '30.

And so fiscal '27, as Sean mentioned, is an investment year, primarily because we see so much growth coming our way. And as you go throughout the next 3, 4 years, I believe we're going to end up improving the profitability profile based on the factors that Sean mentioned specifically.

Go ahead. Sorry.

Andre Madrid from BTIG. I kind of wanted to dive in real quick because we just talked about it, the -- I guess, the revenue step-up. I think the most surprising thing there was maybe the CMS business. I know a lot of that's classified, so you can't really tell too much about what's going on there. But given that it was a laggard this past year, I guess, just what gives conviction, like you said, Sean, that it's going to be so much better in FY '27. And then maybe how do we get to that 7% to 10% CAGR? It seems a bit aggressive compared to what we've seen at that business before, but I might be wrong.

Yes. So look, the Cybersecurity and Mission Services business is actually a critical part of our overall portfolio. We're in these categories deliberately because of what we see in the market and how it actually helps us overall as our portfolio with our customers. And that's a business that Mary runs within her portfolio.

There's a few things I mentioned, and Mary can add to it as well if I missed anything. First is, that business has been under what I call pressure last year, in last couple of years actually, primarily because of the 2 effects. It was a DOGE effect that hurt services in general in the U.S. military and DoW and the intelligence community. And two was also the shutdown because there's a lot of that is customer-funded work with people on seats. So that hurt it.

Mary and her team specifically has had a strategy to how we will adjust our strategy in that business and, in fact, go after a very high-valued, product-related type services that is differentiated and technically in IP, and we have a lot of IP in that area. We can't talk about the details because of the sensitivity to our customers on that specific business. I wish I could, but we're not allowed to do that, and we're obviously not going to do that.

However, that portfolio of contracts and technology that we offer is incredibly unique. We're not doing low-tech work. This is at the edge of the cyber, missions and it's been offensive and defensive capabilities that we provide today. And so we do believe that there's growth in this market for us. We do believe that there is synergy between that business and the rest of our businesses. And we also believe that our customers want us in there because it actually helps the rest of our strategy as part of what other capabilities we should develop on other products to help the customer because we're in the operations ourselves. So that's really the -- and we do believe this -- these plans were developed from bottoms up through our own team. That's how we've been doing this planning and our long-range planning process for many, many, many years.

And we believe that we have a very sound approach. You saw our results and the track record from the past. And so we've been very reliable and accurate in being able to predict where we're going to end up in all these markets. And that's really part of the strategy.

Mary, anything?

I think, Andre, that was a very good question. One thing to add when you look at our service technology within that area and the underlying IP is it's -- there's a moat of over a dozen technologies to look at how do we productize. And that is what, as a company, we're really good at when we talk about the One AV. So that's the strategic approach that we're doing. We have brought in new leaders with that background. And I believe that 7% to higher percent CAGR is realistic.

Let me make 2 points. One is we have streamlined that business as well and made some decisions to do that. And two, to pull the thread on what Wahid said, just to give you an example of how the cyber business fits so well into our other products, it's really important that you're cyber hardened, for example. And we have world-renowned experts in our cyber business that can [ red-team ] our products and others to make sure that what we're providing will, in the most contested environment, still work and perform.

So like Wahid said, it's really important not just for what it delivers to our customer and financially to our shareholders, but also the capabilities that it gives us to be able to leverage and utilize across our business.

Sheila had her hand up before.

Maybe if you could just talk about what drives the growth accelerating to 20% from fiscal '28 to fiscal '30. That's in line with the addressable market. So what new technologies do you bring on? How do you think about the incremental wins? Is it just share gains? Or is it new technology? Or is it more international growth?

Yes. So when we do our planning process, and we do this every year and we look at our past as well, we end up coming up with a range of outcomes. We have a very -- in my view, fairly robust process and a system that we approach and apply to it methodology-wise too. And so the number you see that we have targeted is essentially what we refer to as our base plan, okay?

Could the outcomes be better than that? Absolutely. Absolutely. Well, we don't commit to that. We commit based on our base plan, which is what we call the highest -- most reliable, highest confidence numbers that we have in terms of what we believe is closest to the pin.

Where does that growth come from? It's not just one customer or one product or one region. We have, as you saw from Church's slides, a slew of opportunities within the domestic U.S. DoW, dozens and dozens of programs that he pointed out. It equals to $30-plus billion worth of opportunities, just opportunities. These are programs that the U.S. specifically has publicly announced, and you saw a list of those. So that's one category.

The second one is we have an incredible portfolio today, and we're investing in R&D to continue to expand that. That is a competitive differentiator. So new products for new programs that are coming up is part of our pipeline. We've got a very exciting pipeline, and you've seen it from years you've covered us, how we go develop products, how we launch those, how we commercialize that, how we scale that and how we capture the opportunities. It's a recipe that I think AV is literally the poster child of the industry in that regard. And it's a recipe that now has been copied by the entire defense tech sort of portfolio of companies that are out there, private and public. It is unique to AV and we've been doing it for well over 2 decades, most likely 3 decades, if you ask me, okay? So ever since we've been public.

Last thing is also that besides the U.S. domestic opportunities and programs that Church put out there, there is an equal, if not bigger, set of opportunities internationally as well. And it utilizes essentially almost exactly the same portfolio of capabilities that we have. And he pointed it out that when we develop a product for LRR, like P550, or LOCUST for the laser weapon system, or Titan for a counter-UAS opportunity, we just received a $0.5 billion award that we were talking about from JIATF. That same product has applicability to 55 to 60 different allies around the world.

And since we have those relationships and we have a very solid track record with them, it puts us in an advantageous position with our customers relative to competitors. So you will see growth in those categories from international customers as well. So those 3 or 4 factors really make up the majority of the growth that we are. And it's not like we have to invent a whole new market category or go into a new market, a new customer that we're not known. It's products we're very good at. It's customers that we know really well. It's programs that we've already identified that we can go after and attack and compete and have a good, high win rate. Great question.

Austin. Sorry. This way. Okay. Go ahead. We'll take [indiscernible] after that, and then Peter after that.

Austin Moeller, Canaccord Genuity. So can we talk a little bit about the TAM and the market opportunity for LOCUST specifically, right? I mean we did the Navy test in October with LOCUST on the deck of an aircraft carrier. You just did the white sands test. Both examples, you had 100% interception success rate.

So because the new version of the system is designed to be modular and mobile, should we be thinking about this beyond just putting it point defense at fixed basis? Like if -- could that -- could this potentially compete with like Phalanx, Centurion C-RAM because you need a direct line of sight for that? And if the Navy shipbuilding budget increases, do you see that as an opportunity for retrofits or OEM upgrades onto Navy ships?

The answer is absolutely yes, and I'm going to let Mary elaborate even further on that.

I know you've asked such a good question because it's right in line with what we are seeing is the growth areas. So just if I look at the Navy alone, what you're hearing right now is we want to containerize. Interacting with systems like a Phalanx, those are integrated into a system. What was very differentiated about the USS Bush demonstration is the container actually rolls on, rolls off. So when you think about all of the ships, you have the ability to transport those between the ships. And being able to do that on an aircraft carrier to a frontline destroyer definitely shows its capability when you have systems like Phalanx like you had mentioned. So absolutely, in terms of total addressable market.

You talked about point defense for air-based air defense, but the modularity also comes with modularity with vehicles. So currently, we're on 3 different vehicles: the JLTV; the ISV, an infantry squad vehicle; and the Stryker. And that modularity helps us be more multipurpose with all of those. See what Trace has done with the P550, you can actually see batteries move in and out. We have taken just what we have learned across our company and done that for our systems, so they're maintainable in the field as well. So really taking what Rob said about commonality across the company and applying that to all of our systems.

Church?

200-plus capital ships, right, in the Navy inventory; hundreds of priority, right; asset infrastructure sites within the Department of Wars, right, registry. Every air base, right, every critical site. Now with FAA clearance for safe domestic usage, massive DHS, right, federal, state opportunities there. And the international customer demand, we're already filling it. Watch this space, right, because the opportunities there are just as big.

Yes. And so just to add one more comment to that, Austin and the rest of the team, I've known many of you for a long time. If you recall about 6, 7 years ago, Switchblade was a small business for us and loitering munition was not even well known in the market. And so we were investing.

In fact, prior to Ukraine, there was not a single public video of a Switchblade hitting a target because the U.S. didn't want to have it out and we respected that, and we didn't really publicly put out anything like that. Since the Ukraine conflict, the public videos of Switchblade being successful has been phenomenal, right? You see the Ukrainians putting it on YouTube and everything else. This -- and so now it's about $0.5 billion business, growing to be much bigger than that. And this industry has grown.

I feel that the laser weapon systems for counter-UAS is in a very similar inflection point and a similar stage of its adoption cycle. It would not surprise me in 3 to 5 years that this market is in the billions and billions of dollars, number one, because it is the -- we have studied all the technologies that is going to be effective in defeating and defending against a drone war, a drone conflict, which is the most likely scenario in the future for every single conflict. You can see there, right?

And laser weapon systems, there's technically 3 or 4 key technologies. It's kinetic, the FE, it's RF jamming, it's directed energy and it's high-power microwave. Directed Energy has got the biggest, in my view, potential and relevance of being the -- I'd say, fairly large, if not the largest chunk of that market opportunity. And so that's one. That's the backdrop.

Number two, AV's position in this market is incredibly compelling. Not only do we have systems that are validated in the field with the tests that Mary mentioned and Church mentioned in these operations that have a phenomenal track record, but we're also -- their systems are designed, as she said, modular, so we can put it on a whole different types of platforms for the variety of different types of targets and missions and sites that protect. And the safety record of our systems is remarkable. FAA just recently did a test. And they specifically mentioned our system, the Department of War did as a result of that.

And so I think we're at the cusp of a very large market adoption with a very unique capability and IP. There's a lot of IP in that capability. It's not something that somebody can copy overnight. It will take you half a decade to a decade to even become a player in the space to be relevant in the space, in my view.

And then lastly, I would say that a critical inflection point market mover, in my view, adoption-wise is the U.S. Army's E-HEL program that Church mentioned, the Enduring-High Energy Laser program. They have announced that it's going to be roughly about $0.5 billion contract. We're competing for that. It's not been decided yet and announced. We believe we have the strong, strong potential success or opportunity -- yes, the odds of succeeding in that. And they've said that it's most likely going to be a single-source award for that contract.

That is the first contract, to my knowledge, for a production-level laser weapon system in the U.S. Department of War's entire history. They've spent money in developing things and testing, but they haven't actually awarded a contract for production yet, to our knowledge. And this would be a game changer. So that category, the counter-UAS, led by the LOCUST and our Titan series is poised to really grow over the next 5 years plus very handsomely.

I think we had -- yes, Vivian, go ahead.

Back there, sorry. I have Vivian and Daniel, go ahead.

It's Colin Canfield, Cantor. Maybe if you could talk about the growth categories and where you're taking a haircut versus '27 requests and kind of walk through by each subject area where have you taken the most haircut, which areas are most at risk? And then if you could also talk through the cash flow trends over the multiyear period, maybe walk us through what you're assuming in terms of working capital and CapEx?

Okay. Let me take the first part and then you guys add to it for the second, too. In terms of haircut, this is one part that's really complicated about the government fiscal year '27 budget. Historically, the U.S. Department of War has submitted a budget, which a vast majority of the spend has been in the base budget. The base budget, not the supplemental part, right, the discretionary part.

This year, they've done something very unique. Because these categories are getting outsized amount of additional investments, they have taken dollars out of the base budget and lumped it into the discretionary category as a much larger dollars and have increased the amount significantly, right? So if you look at the base budget line items, which usually have very specific detail in the budget, it looks like perceived as, oh, there's a reduction here for small UAS, there's a reduction here for this.

In reality, that's not true. I don't recall any category as a total budget, if you look at both supplemental and the base budget that we're getting a haircut. No. In fact, all of them are up, up, up. The department has intentionally chosen the strategy to put more dollars into one larger bucket so they can have more flexibility on what they're going to buy and how many of which. And that, in my opinion, the number one reason for that is because the department is not very clear yet on how many of what they're going to buy because these categories are expanding and growing very rapidly and their requirement process and the acquisition process is behind the actual budgeting process.

And so I don't believe that there's any category that we're getting a haircut in terms of the government spending dollars overall. It's just moving into the different colors that makes the optics look a little bit complex.

Sean?

Yes. In terms of the free cash flow, a great question on that. So last week during our earnings call, we provided some guidance around our free cash flows for fiscal year '27. We know it's an investment year. We're not expecting to be positive on a free cash flow perspective. We have a strong balance sheet. We're able to self-fund that. And throughout these planning years, we expect '27 to be the peak of our capital, and we expect that to come down to more historical levels. Working capital will rise over those years, but we're seeing improvements in our cash conversion and our shortening of our cash conversion. So we're expecting to turn positive in free cash flow and continue that positive trend throughout fiscal year '30.

Okay. I think Peter goes next before that we submitted.

Peter Arment from Baird. Wahid, thanks for that on the kind of budget discussion. But maybe if you think about some of the faster-growing areas, Precision Strike or Space & Directed Energy, are there certain milestones here that are coming up over, say, the next 12 months, but are going to need budget to be approved in order for things to move forward? Could you talk about maybe some of the programs that you're expecting to hit some milestones, but may be tied up in budget activity because of CRs, et cetera?

Yes. So one of the reasons our guidance for this fiscal year is about 10% top line growth despite the fact that the ask for the government is quite high is because we believe that the likelihood of a government budget passing as a full budget for the Department of War on time, which is usually supposed to be end of September, beginning of October, is lower probability.

And so there's a strong likelihood in our view, and I think the industry agrees with that, too, that there's going to be some delay in actual approval of the budget, which means some of these dollars are not going to hit the accounts of our customers. Our assessment is sometime early calendar year '27. And then by the time the money actually makes it to each department to actually issue contracts or award a task order, you're talking about almost March time frame, probably. And so that's towards like the end of our fiscal year, F '27. So for that reason, we have been more realistic about the expectations there.

In terms of milestones, there are several, several milestones. All the programs that you saw that Church had outlined has, to some extent, public disclosures from the customers that says we're going to do the following thing by this date, and a bunch of it is not public. And we're not in a position to openly disclose the information that our customer hasn't disclosed themselves. But there's numerous milestones.

One great example is the one that I mentioned on E-HEL. Our customer, U.S. Army, has -- we're in contact with them very regularly. We're in very close discussions with them. They are intending to award that. They've made public statements within the next 3 to 6 months. Our expectation is probably during our second quarter will probably be some announcement by the government. So that's just one example.

LASSO has several programs, launch effect has several programs. And in those 2 buckets, the Directed Energy and also in the loitering munition/precision systems in Directed Energy, we are very well positioned as several milestones.

Another thing I want to add is that for both of those 2, besides the U.S. DoD milestones and awards and announcement that might be coming up in the next 3 to 6 months, there's also several international opportunities and customers of allies that we're actively working with that we expect decisions from them throughout this fiscal year. And we're going to keep you updated on it on that regard.

Anything else you want to add, Church?

No, I think you're exactly right.

Byron? He does a much better job than me. Yes. Thank you. You get the side.

Cool. Maybe just a question on the investments for Rob and Sean. Just a couple of here just to make sure we kind of understand. So with this incremental $4 billion of revenue, so kind of think about the company in 2030 being kind of a $4 billion revenue company with like $6 billion-ish of production capacity to grow into in the subsequent years, a, if that's correct?

And then, b, I think, Rob, you mentioned the difference between the total CapEx and the production expansion, but still kind of if we look at the -- I think it was like 3/4 of the CapEx was going to production expansion, that's still about $200 million versus the $130 million that you talked about. And so what's sort of the delta there?

And then lastly, just kind of how you guys think about the return on investment here? If you think about the $130 million of CapEx leading to $4 billion of revenue at some acceptable margin, that seems like a pretty massive ROI, but there's probably more -- maybe there's some tail end of the CapEx as well to think about. When you guys think about ROI there, how do you think about it?

Yes. So I guess I'll start and then Sean and I can tag-team it. You have to look on my chart, you have to look and at the left and the right side. So it's more than just $130 million for the facilities for our total CapEx. The real delta if you take that 75-ish percent times our total spending and look at that for facilities, the big delta is some other purchases that we're doing in Simi Valley. So that's the difference. So the numbers tie out.

You're spot on with the $4 billion of total revenue capability versus we're projecting $2 billion. So we have some opportunity to, as Wahid said, if there's some additional upside or the things go into different market categories than what we would anticipate today, we can support that. And Sean, I don't know what else you want to add and maybe I'll follow up...

No, I agree with all of that. And in terms of ROI, we look at through all of our detailed plans. We look at the investments we're making, both in the research and development as well as CapEx, to measure the returns so that we place those bets in appropriate areas. And we have a good track record of doing that. We understand where the markets are going and the size of these markets, and we believe that it's a return a good amount for our shareholders.

Let me just add one...

Go ahead. Sorry, Wahid. There's one other point I should make because you might be -- I'm anticipating what's behind the question. And you might be thinking, well, why would you do $4 billion if you think you're only going to need $2 billion. And a lot of that comes as a lucky strike extra, right? You have to facilitize the line and you have to have one -- at least one shift. And you can get that additional capacity by adding additional shifts without additional CapEx.

So we've scaled our CapEx, and we're getting the additional revenue from that $2 billion to $4 billion, but it's not like we're spending twice the money to get the $4 billion from the $2 billion. I just thought that was an important point that I should make sure everyone understood.

That is actually a very critical point, which is, one, we have to plan for not just our base plan, we have to have optionality for increased demand, which we believe that there is a higher likelihood than lower likelihood, right, given on the downside side, A.

B, what Rob just mentioned, some of the base investments like it's way beyond 4 years' worth of planning. When you build a facility to manufacture things, we've done the math and we looked at alternatives, buying the land and buying the building and building that is very advantageous for us actually long term. It's part of our sort of recipe for success, too. And so that is a 10-plus year investment. We're not going to have to buy new building, put up walls. The incremental additional investment to go even beyond $6 billion over the next 10 years is much smaller than the initial capital that it takes to build the foundation.

And so we've been around, we intend to be around and these are sound investments that we believe that is going to give us leverage long term. And it is an advantage that we have in the market. Because our facilities, we turn them around and get them to operational levels in 12 to 24 months from the literally clean sheet of paper. And that is quite remarkable to get to a $2 billion additional capacity in 12 to 18 months for a production line.

I think you guys are going to decide -- yes, Byron.

Okay. Byron Callan, Capital Alpha Partners. Three questions on international. First, what's the share of international when you get to FY '30? Is it still around that 30% or much higher?

And then, Church, the international strategy, you're selling product, but is there an opportunity to sell complete systems with AV_Halo, wrapping your other products inside that offering?

And then, Scott, can you talk about international facilitization? A lot of people want localization. Where does that fit in your thinking about what you might need to do from an international footprint?

I think I'll take the second part first. So providing systems like Titan, providing systems like LOCUST, right, on the counter-UAS side, providing systems like JUMP 20 and, in the future, P550 on the multi-mission ISR side, gives us that anchor capability that always has to be networked into some larger framework, right, larger architecture. We now have that larger architecture and are feeling the demand for that. And it's an open architecture that will nest within national architectures, right, already instantiated architectures that have been deployed elsewhere. We're doing that domestically. We're doing that internationally. I think that the opportunities that we have over the period for providing not just products, but full solutions, right, multicomponent solutions is going to grow. And that will be a first for AV providing this.

In terms of the international mix, just a year ago before the BlueHalo acquisition, we were more international revenue than we were domestic. That was based on selling those products across those 55 countries, selling across domestically and internationally. Through fiscal year '26, that mix changed around 28% international and 72% domestically. By fiscal year '30, we're expecting to see that improve and increase as a percentage, maybe not back to 55%, but improving beyond the 28% and lower than 55%.

Okay. Good. Go ahead, sorry. We'll come to you after that.

Two things I wanted to ask a little bit more about, Wahid. You referenced the current less than traditional funding situation. So in the -- through 2030 forecast, can you talk more about what you actually assumed for reconciliation, DOGE, marketplace? Or is it not even really like that? Is it very bottom-up product by product, program by program?

And then second, competition. There's just -- every day, there's more companies talking about launched effect and loitering munition and one-way attack and counter-UAS. How do you stave that off? And why should investors not be worried about win rate or pricing competition that flows to margins?

Yes.Great questions. Let me answer the first one first, in terms of the budgets and what our assumptions are. It is more the latter that you described. We don't do our long-term planning process purely on the high end -- it's like high level budget growth dollars. That to us is just a validation of are these numbers really real or not. The way that we develop actually our plan details is purely from bottoms up. We look at product by product, customer by customer and program by program, opportunity by opportunity. And vast, vast majority of our customers, while they don't get their funding for multiyear, almost all of them, they do plan their programs out 3, 4, 5, even 10 years out.

So for example, LRR has been planned for several years, and it's expected to go for several more years. LASSO is the same. E-HEL is the same. Every single program, essentially you saw on the list that Church presented, has a detailed sort of acquisition strategy, units in force structure deployment, enablement, training, logistics for several, several years. And our team is very close to those customers and program offices, and we get that information and that applies to our forecasting based on probability and all kinds of different things that we do to give us a forecast on what we think the range of outcomes are. That's, by far, the biggest driver on how we plan our long-term plans and even our AOP process for the annual years.

In terms of competition, this -- I've been with AV for about 1.5 decades, 15 years or so. And this question has been with us since inception, since we've been actually public. And the argument has been -- or at least the argument is that there's lots of players in the space, how do you maintain your share and how do you maintain your advantage pricing wise and margin?

Over the last 1.5 decades to 2 decades, as I said, there's one point that I actually counted. There was over 1,000 competitors in our space, 1,500. And then we stopped counting. This is a few years ago. And I would say 95% to 99% of those companies don't exist today. You don't even hear about them, okay? There's maybe a handful of them that's still around.

And we have proven to be able to compete not against the large defense primes domestically and internationally, very successfully for multiple decades, but also against start-ups that come into this market with huge, huge expectations and claims and arguments. I'm not saying that to be arrogant or to tout something that's not true. We understand the competitive landscape quite well. We assess and track that very carefully on every single market and product that we have. And we understand also what it takes to win. And we've been actually very successful, if you look at our track record, being able to maintain that and deliver on that.

Is there more competition at this phase in certain areas? Absolutely true. But the market is growing so fast, number one, that even if we don't keep the same run rate, and you can see the run rate that we have is not very aggressive based on the opportunities, in the $35-plus billion worth of opportunities that we're going after. We should do very, very well.

And the second thing is that our track record of being able to deliver and produce at volume reliably and have products that are relevant because of its battle-proven credibility gives us another advantage. And if you just look in the last 2 years when we were together, there's been several programs where our customers have intentionally have awarded it to us and someone else, 1 or 2 or 3 or 4 competitors. Or in some cases, we didn't get the initial award, and we didn't want to compromise. And we've come back and the customers obviously come back to us and says, "No, we're going to cancel that. We're going to go back to you." And for those of you who've known us for years, you have seen example after example after example of that.

And it's because we're very careful what we promise, and we're very, very intent in making sure that we deliver on that promise. That's not true in the industry with a lot of our competitors. And it's no blame or a fault, and I'm not saying that, that's the fact. And it's proven by track record in the market and our track record in the market as well.

So yes, it will be competitive. We've got IP. We've got several, several moats in our solution offering that allows us to be able to compete successfully and execute and deliver on our expectations. And I think it's a very important point.

Yes. Just to add a little bit on that, Wahid, I mean, we talked about it in previous presentations today, but our relationship and our intimacy with the customers gives us a huge advantage, right? They rely on us. But we also rely on them to tell us the problems that they have, and we go address those problems. And we compete on a regular basis. But we hear the requirements, we listen to their requirements, we listen to the things that they need and then we develop new systems like P550 that meet all those requirements, right? We show them a piece of paper and say, "Hey, if we build this, well, check a box." And the answer is always yes. And then we have to go and execute with excellence.

And that's demonstrated by the previous award on P550. Do we compete with multiple competitors? Yes. Was there 2 awards? Yes. 82 systems to AV for P550, 8 systems to the competitor. And so that's our expectation, is yes, there will be competition, but because of our position and our relationship with our competitors, we will maintain that leading position.

Vapor is another example. We did not win, as Wahid said, sometimes we don't win. And the customer comes back to us. We didn't win on the Army directed requirement, company-level directed requirement for MRR on Tranche 1. But on Tranche 2, we did. And it was because the Army gave us feedback that says, these are the things that you need to change and then we will buy it. And then we went and made those changes and delivered on it and demonstrated it to the customer, and he said, you listened. You've heard us. And now we're going to buy it.

These are just 2 examples in the last 6 months alone. And if you go back, there's at least another half a dozen examples of similar situations.

Yes. I think we can also -- sometimes people will think of the market as UAS or uncrewed systems, but they're submarket segments, and we're in differentiated submarket segments in my view. And this stuff isn't easy. It's not easy to make Switchblade so that it works 100% of the time and it's tactically relevant. And it's not easy to scale up when you're having a prototype and then going to full rate manufacturing. We know how to do that. We've done it successfully. And you saw our investment strategy to be able to make sure that we can continue to do it going forward.

I hate to add this a little color, but it's another evidence point. I was just back from an Asia Pacific trip 3 weeks ago. And a customer was specifically asking about Switchblade 600 and its ability to actually not only hit a tank, but destroy a tank, like penetrate the armor and go inside. And was asking, I'm not going to disclose the details, but can you show me exactly how that's done in the field directly? And obviously, there's not just one but hundreds, if not more than hundreds, of videos that's out there.

And so I asked the customer why? What is it so, so special about this particular thing you're so focused on? And the reason was that a competitor product has everything and they claim all that, but it doesn't actually achieve the mission. It hits the target, it cannot penetrate the tank and it does not destroy the tank. And that's not a very trivial thing. The way that the warhead is designed and the weapon or the loitering munition comes and it hits the tank, the angle of attack, the spot you hit it in, the warhead that's used and how it does, there's a lot of secret sauce and expertise and know-how on that. It's taken us years and years of perfecting that. And so when we develop a product, we know how that works. And the competitor solution has failed to actually do it with several, several tests. And it's going to probably take them another 2 years to even get to that point. Would they figure it out? Most likely eventually. But that gives us an advantage, and that's a real example of my recent trip just Asia Pacific to one customer. And I can give examples of that left and right.

Anthony Valentini from Barclays. My first question is how can we think through that $4 billion number in 2030 in terms of like the different products? So how much of that is Switchblade and some of the other things?

And then my second question is, how do you guys think about the strategy internally on IRAD? Meaning if you guys are spending an additional 5 percentage points on internal R&D, like what exactly are you getting for that? Is it you're getting 5 points of additional pricing? To me, it's like if you're getting 5 points of additional pricing, but you're spending an additional 5 percentage points, it's a wash to the bottom line. And so there has to be more to that. So if we can just kind of walk through that and understand that, I think that would be helpful.

Let me take the second part of your question, and then, Sean, you can take the first part. On the second part, first and foremost, the appetite for R&D investments within our business, fortunately, this is a fortunate thing, is incredibly large. The reason why is because our market is growing and we have so many opportunities that we can invest in that, quite frankly, as a lot of them have very, very favorable ROIs on them in terms of odds of success, the capability, its unique differentiated solution set, the market, the customer signal, et cetera, et cetera. So it's really a hard thing for us to make sure that we strike the right balance of where do we invest, how much do we invest and do we allocate that effectively, A.

B, we have a process internally that we actually follow very rigorously on if we make a dollar worth of investment, what is the highest return on that dollar and highest probability of success? We take that very seriously because if you look at this track record of AV and the products that we've actually invested in the past decade, not even a year or 2 years, I don't think it's actually matched by anybody in the industry. Getting it right, whether it's Switchblade 300, 600, Puma LE, P550, Vapor 55, I mean, you go down the line of businesses here. We said we're going to invest in this area. We've had some, one that comes to my mind a few years ago, and that was because the market didn't develop, the commercial market, right? And we still made quite well off of that because we'd applied the product to our other platforms.

So we have a fairly good -- it's part of our DNA that allows us to say, okay, this is where we're going to place the bet and here's why and why that makes sense. Is it perfect? No. It's never going to be perfect in my view. And we always tinker and we tweak and improve on it as we go. But we have a very deliberate process on that. And these are things that some of them upfront looks like, well, why do you invest in that?

Taken point, P550, okay? I'll just take a few examples here. That development started about 1.5 years ago or so, roughly. And we knew that there is a program called LRR, and we knew that the requirements were very unique. We were the only player that I know of that said we need to develop this platform to ground up from a clean sheet of paper because the Army's requirements and the mission that is required to operate in is there's nothing out there that we provide or someone else provides that can meet it.

So then we went down this path of investing in this and quickly coming up with a prototype and showing it to the customer. And the customer essentially -- the U.S. Army came back, says like, you addressed our need. This is the only solution that we can think of today that's available that can make it. So if you go forward, you've got a good chance. That's the best they can tell you. And we still have to compete. We still have to execute. We do that.

Now that product, we just got $117 million of contract, which is the initial award of this LRR that's potentially about a -- if you look at the base of acquisitions, it could be between $0.5 billion to $1 billion, just U.S. Army. I firmly believe that this platform over the next 5 to 10 years is a $1 billion platform. It's a franchise that is going to be probably very similar to a Puma franchise or a Switchblade 300 franchise.

And so you can't just assess this based on a $117 million contract award. That is an investment that is going to lead to several years of additional contract awards, international customers, programs, Army, Air Force, Navy, et cetera, et cetera. And that's how we do it. And so I think we have a deliberate process, and we're going to continue to do that and there's appetite for even more.

I'll go -- hand it to you for the second.

Yes, sure. So your question related to where the revenue growth is coming from. I had a chart in the deck that basically took us from our current fiscal year '26 actuals to the $4 billion of revenue and each of our operating groups, what those growth rates are expected.

Inside of that, there's different growth rates within it. Things like Switchblade are going to continue to grow, but things like counter-UAS RF are going to have a higher growth rate than the average for that group. Similar type in Space & Directed Energy. The LOCUST is going to be at the higher end of the growth rate versus some of the space technologies.

Each one of those, I've tried to highlight what the key drivers are, P550, JUMP 20-X is going to be in our Group 1 through 3 in UAS space. So each one of those has a key driver that will get us to the overall $4 billion.

Okay. I think there was a question here, Pete -- I'm sorry, whoever has -- yes.

João Santos from UBS. Can you talk a little bit more about the commercial opportunities that you have in both segments? And if any of that is already embedded to 2030 targets? And how much visibility you have?

Great question about the commercial market opportunity. And so as I said, many of these products, and I think Rob illustrated this, has more than one customer, one program implications and opportunity for it. There's several areas where some of the investments we made and the capabilities that we have, that has significant commercial market opportunities. So first, number one is our Titan series on the counter-UAS. We have 2 plays in the counter-UAS space that I think has huge potential commercial, nondefense, call it, civil applications. Airports, police -- sorry, stadiums, sporting events, music festivals, critical infrastructures like nuclear power plants, hydroelectric dams, critical government facilities, commercial facilities, data centers. You go down the list of sites that are potentially prone to these types of what I call drone threats and attacks, both domestically in the U.S. market as also internationally. It's enormous.

It could dwarf the size of the defense market opportunity. We're not counting on that in our numbers, but that's the kind of upside that we're looking at on the RF jamming systems. Very similar or some slightly similar application existing or LOCUST Laser Weapon Systems, okay? That's the same.

And there's also opportunities for other products that we have. I'm sure I'm missing a few others that has implications for that. Some of our small UAS systems have public safety applications for persistent ISR. Same sites that I mentioned for like stadiums and music festivals and all that has the opportunity to use our ISR mission platforms such as our Pumas and Vapor and P550s.

Is that a large portion of our growth strategy? No. We have plenty of opportunities to go in the defense markets to achieve our plans and our growth targets. And those are additional potential upsides that we can capitalize on. Anything you guys want to add?

Yes, Pete.

Pete Skibitski, Alembic Global. Wahid, can you talk top level about M&A? Obviously, you have a great organic outlook. So was M&A kind of a distraction almost at this point? Or do you still see some obvious capability gaps you'd like to fill? And also, if you could talk specifically as well about space because we've seen so much consolidation in the space world, a lot of competition, but it's growing. So I'd love to hear about your thoughts there as well.

So M&A, definitely not a distraction for us. We are not focused heavily on M&A as our growth strategy. So you can see the numbers that we've got in here is primarily organic growth.

M&A for us serves a specific purpose based on the positioning of our portfolio within the demands and the requirements and expectations of our customers and markets, okay? And you see the portfolio that we have. It's a very, very impressive, broad and deep portfolio solutions. But within that, there are several areas of what I call gap-filling capabilities that are ideal for inorganic acquisition to fill those gaps in terms of products and capabilities. And there are several of them. There are several, not just one. And I think that we're going to continue to do that.

At the same time, we're very judicious on that, okay? The market expectations or valuations today is quite rich in general in our space. And we are -- we know what we're doing in this area, and we've got a very, very good track record so far, right? And so we're going to continue to do that. We're active in the market. We're looking. We've got the balance sheet. And I also believe that our customers are -- to some extent, are sort of not pushing us, but are leaning towards us being able to help them in those areas.

So we see the customer signals first, and then we look at our portfolio and we see the gaps. And we look at it, is it something to make or buy? And if the option of buy is more favorable based on time to market, based on return, based on valuations, based on odds of success and risk, then we do that versus the domestic. Vast majority of those, you could see, is organic growth and organic capabilities that we develop.

In terms of the second part of your question was space, yes. So like I said, there's a huge demand for investments for us in the markets that we're in, and space is definitely one of them. There are several areas that we can invest more in space. And it's a tough decision because there's so much opportunity for us to invest.

Laser comms that you see there, laser communication terminals, that Mary is managing, I believe that is another market that is not well understood today. Every satellite that U.S. has in space, whether it's LEO, MEO or geosynchronous, relies on RF communication. We've got the world's industry-leading capability on our BADGER phased array system, which we're investing in and we're going to continue to make that as a commercial product as part of our strategy because we see the potential opportunities in the programs that the Space Force and Air Force and our international customers are planning on awarding and competing and going after.

But beyond that, every single one of those satellites and the systems that communicate and track and control those is potentially a candidate for a laser communication terminal. And we've got the world's leading -- we competed in that program and we won hands down as a down-select against very, very viable, relevant, credible world-class players. And I think that we could do a lot more in there. I believe that our military is going to invest more money over the next several years, and we're positioned really well.

Should we be investing more? It's a really difficult question. I think we're going to continue to execute and we're going to work with our customers. As we see the signs, we're going to throttle up or down as we go forward on that.

But our space business, as you saw in Mary's portfolio, is growing above our standard percentages. And it's primarily because these particular capabilities and the phased array has a huge potential upside and dollars are pretty big. And the U.S. is very focused on being able to regain our dominance in the space category, and these are critical to that.

Wahid, this is Louie DiPalma from William Blair. Counter-UAS was listed as the largest market opportunity. I think on the slide, it said $15 billion out of the $37 billion total addressable market. And you won the Titan award last week. My question is, do you see synergies between having Titan, LOCUST and Freedom Eagle all under the AV banner? In the past, I know you said, as it relates to Ukraine, you paired your Puma system with the Switchblade. And so there was interactions between both of your systems and how that was strategic.

But do you also see that same dynamic on the counter-UAS side? And does that provide you with a competitive advantage in this crowded market? And in other words, can you provide more information on how you were able to beat out some of the others for that win last week with Titan?

So the short answer is definitely yes. We deliberately, first of all, decided to go into the market and play in that market, A, because there's a huge adoption cycle that's a little bit less mature than drones itself, the drone market and the lethal drone market, A.

B, our solution set and our strategy in that market is also quite unique. We don't believe in one single solution that is going to solve all the problems for the customers when it comes to defending against drones and kamikaze drones. We believe in a layered approach.

As I said earlier, we believe that there's primarily 4 competing or options of technologies that allows you to defeat against these things. And we are in at least 3 of those 4, okay? The first one is RF jamming. And we saw the award that we got. It's a fairly large award. And it's our initial award as part of the Golden Dome initiative. The JIATF was created as part of this, the Golden Dome initiative is part of that. And our solution is developed to actually interoperate as a system solution for the whole mission of a customer or a site in the long run.

And one of the key ingredients to that is AV_Halo software platform, the ability that you have a site and you've got threats that are going to come at you and you'd be able to assess the threat, identify it, classify it and then pair it with the right defeat system. The right pairing is really basically weapon pairing system, it's referred to the military. That is something that we've actually already attacked as a software solution, and that's part of our proposal for the Golden Dome initiative as part of AV_Halo Dome. So that's the first award.

The second layer is direct energy, which I believe is going to be a very large portion of the solution set in the market. And then the third, if those 2 fail, the third is the kinetic kill. And we've got the pole position with the Freedom Eagle-1. We developed that. It's going to be a category killing category setting franchise.

As Church said, we're a new missile producer. There aren't too many of those in the last 30 years in the U.S. military's entire ecosystem. And they've selected us. They've funded us. Congress actually added more money to accelerate that program. And that $95 million, $96 million, there was more funding to accelerate, and we're going to have to deliver more missiles and test them and get into safety confirmation and low rate production. Now...

[indiscernible]

That is correct, yes. And so that's why we're investing in the Huntsville facility to ramp up production. Our customer on that program is just literally is demanding us to go faster. We're going as fast as humanly possible. We are already faster than most players in the market, but they expect us to -- they're demanding even faster. If we could go faster, we would go. We're doing everything humanly possible to go faster.

So to answer your overall question, all these systems are over the next 3 to 5 years are going to have what I call a site mission requirement for defense in that site -- and that's part of the Golden Dome effort that the U.S. military is actually actively working. And then that site is going to be classified, what level of criticality it has and what level of defensive mechanisms you're going to put in place. And then part of that is the solution set that you see from us and others.

But we're not even actually saying just unique to ourselves that we're going to integrate our systems and make it interoperable. To date, there's 2 sites that the government has chosen. One is actually that we've announced -- they've announced publicly and the Dakotas, Grand Forks, where we're integrating and deploying the entire system as a layered defense system for that site against all sorts of threats.

Our software is in use, our hardware is going to be in use, and we're demonstrating we're going to be most likely the first sort of proof point in the public eyes that U.S. has actually carried out a successful implementation of the Golden Dome initiative when it comes to the inner layer. There's an outer layer and inner layer of the Golden Dome initiative.

You can put all 3 [indiscernible].

Absolutely. That's our plan. And it's going to integrate with other solutions from others. That's the plan today. And it's going to actually have C2 and comms as part of the battle management system that can connect to other software ecosystems and other platforms that the military uses, so we can actually share information from other sources as well.

It's called Halo_Shield So it provides a full shield protection.

And it's not just unique to our products as well. It will be other sensors as well. We can simulate the infrastructure, what the customer -- what the threats are and tell the customer, how many Titans, how many LOCUSTs, how many of these 6 sensors do you need to have the total coverage.

So when we went and engaged with the Department of War on the Golden Dome initiative, I personally met Church has met with them multiple times as Mary and the rest of our team. The feedback from our customer was, what you're doing is incredibly unique. There's no one that can actually today do and achieve what we just showed them that we can do.

And we're now going to demonstrate it in real-life example at the site in North Dakota. North Dakota, Grand Forks. And so it's a very important site. It's the same site, by the way, that our system that actually we were awarded the contract to characterize the telemetry and the performance of hypersonic missiles.

Eventually, these systems have to protect, track, trace, identify, categorize and apply pairing weapon systems to hypersonics and other missiles. And this system has to be interoperable with all that. That's our goal. That's why we're investing in it. That's why I think to answer your question is why we believe that we're unique, and we have an advantage to be able to actually achieve that success in this -- it's going to take some time because not us, we're ready.

We've been ready and we've been deployed. We've invested money in it, and we've already developed solutions. We're demonstrating it. It's going to take some time for the government to go through the process of planning and implementation and budgeting as well. Who has the next... Daniel...

Cashen Keeler with BNP. I guess on Titan, I think it's the highest margin product in your portfolio. So with respect to fiscal '27, how are you thinking about the EBITDA contribution from that recent win?

And then second question, on the capacity ramp across your portfolio, how can we think about start-up costs and how quickly you can move down the learning curve and what the margin uplift can look like after that?

Yes. So let me just briefly mention LOCUST specifically. We don't provide that level of details in terms of our plans of what product specifically is going to contribute, how many dollars on the margin and all that.

Overall, our strategy is that we want to develop these products as commercial items with some co-funding from the customer, which we always do because it allows us to believe that the customer is serious about this capability gap, but quickly transition that into a firm fixed price commercial item. It is very deliberate in our strategy. It's been for the last 20 years. It's a strategy that now everybody is talking about, and they're literally trying to copy.

A, on our program that we're competing for the U.S. Army, we intend to do the same thing because we have developed this, we have our own IP. We believe that it's going to eventually be a commercial product. And we intend to go and negotiate with the customer, if it gets to that point on a firm fixed price basis and make sure that this product is as a commercial item, it's sold to the government and to our other allies because it's got a much global application applicability. That's Mary's team's plan.

And we're -- we know that recipe. We've done it with all the other products you see in this room, and that's what we're going to end up doing. Is it going to be a contributor? Yes, because the dollars are small for this fiscal year. If you fast forward over the next 5 -- 4 years, 4 years, 3 years, 5 years, it is going to be a significant contributor.

And it's also an area that it's not easy for someone to come in and unseat us. You don't get into the laser system -- laser weapon system overnight. It's just not something like -- it's -- the reason why we're great at this is because Mary's team has 20- to 30-year experience in the Space. It has been one of the, what I call, holy grails that the Department of War has been chasing for the last 30 years, 30-plus years.

Look at the records on the R&D dollars that has gone in this category for all the different agencies and labs and even competitors of AV who has received tons of dollars in the tune of almost combined over $1 billion probably. And no one has been able to crack the nut. And I think that this program is going to be the first one and hopefully, that they will announce something soon and we'll...

Wahid, if I can add to that. So the question around the Titan aspect and the recent awards that we just announced, that was baked into our forecast and into our guidance. And part of the discussion we had during the earnings call was the distribution of our revenues and the profitability. We see that in the back half of the year. So this is already factored into those margins and included in our overall guidance.

Okay.

Other questions? Byron?

Well, any thought on the cost per effect in some of the systems that you're offering? I mean we can talk about budget growth, but I'm just curious when you talk to your customers about things like Switchblade or P550, you're offering a capability that should have a lower cost for what some of the alternatives are. Can you just talk about that a little bit, if you may?

Sure. So let me take a stab at it and then you guys can add if you like. There is -- so one of the reasons why the department is trying to put more money in this category and put it into a discretionary bucket rather than specific product and capability is they know that this is a trend and an adoption and a transformation and modernization path that they have to do over the next several years. And that's why these categories are up multiple times than before in terms of spend dollars alone asked, right? So even if the department gets like a fraction of that, it's going to be significant increases in that area.

One of the key reason is because the face of the war is changing, and you see what's happened in Ukraine. A data point, Ukraine published it to us directly and we made it public. In that time period, Switchblade 600, for example, used about $36 million of it, and they destroyed over $2.7 billion or $2.6 billion worth of Russian assets.

These are not assets that they can just make overnight. Some of them are radar systems that take years to replace. And they are not -- historically, Switchblade is considered a tactical weapon -- not to Ukraine. They actually refer to it as a strategic capability. They don't have anything that can actually do what Switchblade does for them. They've told us that directly. That's an example.

Another example is LOCUST. Why do I believe that LOCUST is going to be a very large portion of that counter-UAS solution set is because 2 primary key reasons. Number one, the concept of unlimited magazine. You can reload as long as you have continuous power, you can hit targets in and out, right?

And number two, the cost per kill is at the fraction of what it costs today. To take out a Shahed drone costs today $1 million to $2 million to even $10 million. That's the missiles that we are using today. And the theory is that you see and you see it on the news all the time. That's less than $10 a shot. And so -- and we're going to continue to drive the cost and the price and the value proposition in the favorable direction as the time goes by.

So I think the department sees this. They are going to go broke if they just kept with the same approach that they have today. And that's why there's so much focus and attention on this from high levels of the department. There was an event that they mentioned. I think Mary may know the name of it. Lots of the Department of War's executives actually got their own hands in shooting a drone with the local system. Do you want to -- can you say anything more about that?

Yes. Well, so just 2 weeks ago, Secretary Hegseth arrived at White Sands Missile range, getting the system and having this in his hands with just less than 5 minutes of training, he shot a drone down. So when you asked about cost per kill, why he talked about $1 million to $2 million system, let's take a Tomahawk, and we're still using those to defeat drones. How many shots is that? 5 to 10.

And we were shooting this continuously throughout the weeks, more hundreds of drones -- you're saving right there. You take an APKWS, maybe that cost is lower, 200 shots and you've paid off from the system. So that $10 cost per kill as Wahid said, it just opens the market because on the defensive side, we need to protect the cost. And on the offensive side, we need to show that cost per kill from infrastructure.

And so let me add another thing to this. Yes, a lot of other players are focused on higher kilowatt systems. A, they're incredibly expensive. B, they're not mobile. They're not easily deployable to sites that are moving. If you've seen in our system, you can put it on a Stryker and you're moving, you're watching, you're detecting targets.

And the X3, another unique feature, you can shoot while you're on the move. And we've done that. It's literally part of the spec of the product. I don't think -- I know a single other competitor that can do that.

Third thing is besides the fact that it could do that, we also are -- so in that event that Mary mentioned, it was not just the Secretary Hegseth, Department of the -- the Secretary of the Army, the head of the Golden Dome Initiative, General Guetlein and several others, I don't want to go through the list of names. They pushed the I believe button, 5 to 20 minutes of training or familiarity and you actually go do a real-life drone flight and you detect it, you defeat it, pretty darn good.

So it's just at its initial stages of adoption. I think the next few years, you're going to see that the department is going to start shifting its mindset because in the last 30 years, it's been like people have promised a lot of stuff, and it hasn't happened. because there's been a lot of empty or not really -- and now we're the first company that actually is delivering it.

The last thing I want to mention, those systems that are a lot larger are incredibly unreliable. The operational availability of the systems is atrocious. And you compare that to something else, and we have our customers that are deployed in the theaters and they're coming back and saying, I can't share the numbers because of the sensitivity, but I wish I could share. It is remarkable. The level of availability and reliability of our systems and being able to actually work in very, very stringent physical environments in terms of dust and sand and snow and rain and all that.

Not necessarily, but we can also get a lot more effective power when -- with the technologies that we have to be able to pinpoint accuracy on the drone and hold the spot there. If you think of what you're doing. And also the beam integrity is really important. So we're really strong on the beam integrity, and we're really strong on being able to assess the threat and then hold the spot on the drone effectively.

We'll go back to...

We'll go back to... Go ahead. I'm sorry. You go ahead first because you haven't had one yet.

Okay. So you seem like you're fairly conservative on the budget situation for 2027, but we've heard from other players that there's dollars to be spent before September ends, LRR, MRR, maybe some other programs that you had. So can you talk a little bit about that contrast in terms of, I guess, they call the sweeps, like if they don't spend it, they don't get to keep it. Just help us understand if there's maybe some upside in certain programs that fit that dynamic.

Sure. So the last year's one big beautiful bill, which was enacted in July of last year and finally flowed through the government channels down to customers in February, right, beginning in February of this year. Those dollars are available now. The FY '26 dollars are available now. There are always are always sweeps toward the middle and later in the summer. And you're seeing those, as an example, with the JIATF award last week, right? And there will be other awards.

And it's for the priority categories. It's for systems that are not developmental, but are in production or ready to go in production now. So we have a lot of opportunities. You see it across the counter-UAS offerings, across the strike offerings and frankly, across the multi-mission ISR offerings. So we're in a pretty good position there, and we expect that to play out just almost exactly as you said.

I guess, Sean, just as we look out and we see kind of where sort of consensus expectations are and stuff, it seems like they're kind of below what you're forecasting here. But just in the interest of like having everyone anchored around the right outlook, should we think about things accelerating through the period?

We've got like a CAGR and we've got a target margin. But should we think about the margin expansion and the growth rate kind of accelerating through this 3-year period, '28, '29, '30?

Yes. So first, let me talk about fiscal year '27. We provided our guidance there, and we have a distribution of our revenues, and we're expecting that to ramp throughout the year, including profitability scaling towards the back half of the year. Some of these key awards that just got announced were all factored into our plans, and those margin assumptions are baked in as well. In terms of the overall growth rate and margin expansion, that's going to be not linear.

It's not going to continue to grow 15% to 20% for the whole company. It's going to be different years are going to grow at different rates and then start to ramp up towards the end of the decade to close out fiscal year '30. Adjusted EBITDA should start to see improvements year-over-year as we're seeing some of that scale and some of that mix change. So we should see adjusted EBITDA slowly tick up each year along the way up to the 18% to 20%.

Peter Arm from Baird. We all saw the SCAR hit that you took in January, but I don't think it was an indictment on your capabilities. It was a change to the program and what they wanted.

But maybe, Mary, you could talk a little bit about kind of the capabilities. There's obviously maybe different applications or smaller form factors that could lead to obviously some substantial growth. Maybe how you see kind of the program or the area evolving post the decision?

Yes, that's a great question. While we saw the headwinds of that program come to an end, I see it as opportunity because our investments today have drove us to putting together a strategy that is multi-mission across multiple different customers.

So just since the announcement in January, our system that many of you saw in Albuquerque, it's a 20-foot antenna. It's actually been completed, the build. We're actively testing outside on the receive side. And what we're seeing is that capability of different form factors becomes important for different mission sets. So if we take telemetry, and we just won a new award for our telemetry tracking, then you need a smaller form factor. You don't need such a large antenna to track the space.

So we've seen some really good improvements in that area. If you take different capabilities like multi-mission for electronic warfare, you need different packaging for that. So we're looking through those different form factors. to your point, and also taking the system build that we started, completing it and continually testing it right now for those different applications.

Yes. And so just to add to Mary's point, that specific program, this investment in this category for us is not one program. As Mary said, it's very thematic on this category of capability that's a gap, number one. And the technology and the development dollars that essentially a lot of it the government paid for has implications for lots of different opportunities and markets and applications.

Two, it's mostly the government reconfiguring itself because relative to 4 years ago, the definition and the profile of the threat has dramatically changed, dramatically changed. That's one of the key reasons why the government is reconfiguring itself what to do. the need has not gone away. It's actually probably, in my view, based on the customer feedback, is even higher.

The urgency is higher and the amount of total investments in this category, most likely according to customers' comments to us and the budget dollars that you see is going to be significantly higher. This program was supposed to be about $1.5 billion total, or $1.7 billion. It's going to be well over $2 billion, $2.5-plus billion in spend because the need and the threat is real.

We are pursuing this. We're actively working on it. We're engaged with the customer, and we believe we have a very unique capability. We do. And you've seen it in our history. The customer reconfigures and comes back, and we generally have some good positive outcomes if we really believe in it. So our belief in our system, we've looked at it from clean sheet of paper, would we do this? Yes.

This capability, phased array for comms, RF comms is the next-gen RF comms for satellites. There's nothing that can actually replace that value proposition. Beyond that is laser -- optical lasers. And -- but for RF, this is the holy grail. And we've got the pole position.

And I think we're going to continue to do that. There's some uncertainty about the customers' timing. It's not in our numbers for fiscal '27, but we remain committed that this is a market that we have a differentiated capability, fairly high odds of being able to succeed in it, and we're going to continue to pursue our strategy.

Yes.

Wahid, you mentioned at the very beginning that you thought the stock price did not reflect -- I forget the exact -- the value [Technical Difficulty] midpoint, the EBITDA is 30% above consensus. At the high end, it's 40% above consensus [Technical Difficulty] stock on the day is down 3%.

Any stock can do anything on 1 day, but that's pretty unusual. Usually, a stock will track guidance above expectations. What is the market saying? What concerns do you hear from investors? How do you internalize that? Are there strategies you all can employ to connect the dots that seem to have dispersed in some way, whether that was SCAR or something else.

And if you zoom out on the financial model, I mean, there's been a lot of growth over a long period of time. You just laid out a very compelling case for the future of the company. But the growth rates are also quite volatile quarter-to-quarter, year-to-year. Is there a version of the future of the company when it's larger and more scaled where things are smoother? What do you make of all of that?

Yes. So fantastic question and comment and point. You guys are the experts in that a lot more than I am. So I have limited insight into that. But what I can share with you is what I see and what I have seen and where we are. I firmly believe that our [Technical Difficulty] undervalued relative to the market that we're in [Technical Difficulty]

And we deliver on our promises, which we have a very good track record if you look at the history.

I'm a firm believer that the stock price will take care of itself. The volatility of the stock and the results quarterly is certainly true. It's the nature of our business. When you have a business that's made up of these large lumps of big contracts that predicting the U.S. government and when they are going to make a decision in an award or act on something and they're going to get funding, you know that better than I do.

It's an impossible forecasting job. You go to Congress, you talk to them, I talk to them all the time, Church's team goes, and they all want to do something fast, but it doesn't happen. And nobody can predict. Nobody that I know what, I'm not sure if you do. If anybody know, please let us know because we'd love to know the secret sauce there. So it's just very difficult, and that makes the business very, what I call sort of short-term dynamic.

Quarterly basis, our revenue could be a lot higher, our profitability could fluctuate. But on an annual basis, we've been very consistent in being able to deliver and achieve the outcomes. So I'm a believer that sooner or later, people are going to realize the story and realize the value and that value will be reflected on the price. And I think we like our odds, and I look at our cards and our competitors, I like our cards a lot. I wouldn't trade them. I wouldn't trade it. There's one there.

Con Canfield, Cantor. So the stock has been about 150 bps off since the free cash flow question that I asked, Sean. Maybe if you could just clarify the comment you made before. Is it AeroVironment is not free cash flow positive until 2030 or.

Yes. Thanks for the question. Let me clarify that. So fiscal year '27, we've provided the visibility that we're not expected to be positive on free cash flow. That should improve every single year. We should be positive free cash flow '28 through '30 and continue to improve free cash flow every single year beyond that. '27 is an investment year. We're spending almost $300 million on capital.

That is not going to continue beyond fiscal year '27. It's going to return to its more normal 5% to 6% of revenue percentages. We've seen improvements in working capital. We're going to continue to see improvements as we make those shortened conversion cycles on our sell-offs. So we should see working capital continue to grow, but at a much improved rate, so generating free cash flow.

Thanks for the follow-up. So Up to the blockade and the cease fire, the Pentagon spent about $25 billion on the Iran war. It now looks like they could start actively striking targets and assassinating revolutionary guard corps generals again.

So originally, at the point of the cease fire, they were -- the Pentagon had proposed a $200 billion war budget. So if we see a war or OCO-style budget that gets passed incremental to the reconciliation bill, when do we think that might be available in terms of timing? It's probably more of a fiscal year '28 item, but I'd love to just understand the cadence of that.

So let's say, such a bill was enacted today. You've got about a 2-month right, slowdown from the treasury OMB down to the comptroller, right, down to the program offices in terms of making those dollars available to the program managers, right, our customers. So that's generically, sometimes it's 3 months, but that's about the flash to bang on that spend. Is that the question you are asking?

Yes, that's essentially what I was going for.

That's part of it is that, yes, but that's like the budget was passed, signed, Congress approved it. And then now the Department, Pentagon and Controller and OMB can go execute on it. We're way far away from that signage. And it has to be proposed, it has to be debated, it's going to be tackled and all that.

We do know that regardless of whether a supplementary or an OCO or something like that is going to pass, the department has used dollars from their current base budget dollars and their inventory of stuff that has to be backfilled. It has to be repaid and refunded. And it's going to come in some shape or form. And a lot of that is probably the Army that spent a lot of dollars to my knowledge, and I could be not totally accurate on that.

But -- so those dollars somehow are going to have to get replaced because the department has a process on how to basically take money from an existing bucket, meet the urgent needs of an active conflict and then backfill with dollars that are coming in from later dollars from the budget dollars.

And so I think it is going to be an uptick sometimes in the future, but the timing of that, no one really knows exactly when it's going to be and what form it's going to be. I do think that there are specific products that we have in that category that's very relevant, like things such as you see in here, quite relevant for that type of conflict and the systems that are used in that. Any other questions? Okay. Well, then, first of all, One more.

Thank you so much for the presentation. So we heard a lot about how you think AV is in a much better position compared to competitors. Now when we look at competitors, like I'm bucketing them in 3 buckets, like one of the large primes and definitely agree that you are much ahead.

Can you talk a little bit about like how you're positioned against the international peers like when you're trying to compete internationally and especially like with national security and sovereignty risks, like how are you compared to the like new primes of Europe, near-primes of Asia? And similarly, how are you thinking about the emerging sort of companies within the U.S., the new -- like new age tech companies like Anduril, the Red Cat, et cetera?

Yes. So the international picture on competitive landscape is really, I would say, vast, vast majority of it is roughly the same as it was 5 years ago, 4 years ago, 8 years ago.

We've always had international competitors, whether they're large primes or the small start-ups on almost every opportunity that Mary and Trace compete with Church's team for a program or a capability, we've got non-U.S. competitors that are large and small, but also we have domestic and even local indigenous players that compete in these things. And we have a very good track record of being able to succeed against that, okay?

One area of change that I see, I guess, 2. One, the number of competitors is increasing, but it doesn't mean that they're better. In fact, the quality of these competitors is probably lower, okay? But -- so the numbers are higher, and it's just that more of them, okay?

And the other thing that's different is that the desire from the international customers to have more local content is significantly higher than before. There's always been a desire for local content, but it's been such that it's been -- you have to do offsets and have like services and maintenance and support, and we've always been very successful at the 55-plus countries that we do to offer that.

As the size of the opportunities get bigger and we get more longer-term large engagements or contracts and partnerships, we are actively -- it's part of our international expansion. That's what Church is working on very, very heavily on this year is to have teaming and partnerships with local content. Local content doesn't mean that we have to design everything and make everything locally. We have -- our systems are designed as modular and subsystems, and we could find partners and subsystems. We just announced one and I came back from Taiwan.

We did with a company called Ubiqconn for the ability for us to, for example, integrate our ground control station the common controller, the Kinesis software as part of the AV_Halo for any robotic systems and drones that Taiwan is going to procure for its needs. They saw what the U.S. Army has done in selected AeroVironment, AV, and now they're going to do the same thing. We partner with the local company. They have the credibility. They've got the relationships. They've got a solid, sound business and profitable company, and we are intending to team with them for that particular piece.

And you're going to see more examples of that across the world of areas that we're focused on. Asia Pacific, specific countries, Europe, specific countries and also in Middle East. And we actively are working these things. I think over the years, you're going to see more and more of that from us.

And it's also part of our expansion strategy to have local content, not only in terms of suppliers and subsystems, but also relationships and entities in these places. legally, so we are considered a local or indigenous company, legal entity. That's important as well. And we've done several of those in the last 12 to 24 months. And you should expect more of those in the future. Any other questions? Anything? There's 2 more.

Okay. Are we competing time for lunch? Okay. Two more.

Yes. You -- last week, you won the $500 million Titan award, and you mentioned that there's the potential for a $500 million EHEL award over the next 3 months. The next 3 months is the crunch time in the government fiscal year-end. Is there anything else that we should be on the lookout for in terms of big chunky awards that are in the pipeline that could move the needle?

Yes. So first of all, the rate at which we've been announcing and the department has been announcing, I mean, significantly large strategic wins, to your point earlier, I believe it's really undervalued and misunderstood. There are not too many companies in our category that gets a $0.5 billion production contracts, sole source, multiyear for these types of capabilities that's like at the initial phase of adoption.

So there's several. But I can't talk about the exact timing of those and the specificity, both from a competitive nature as well as our customers' confidentiality. However, EHEL is a really critical one. There are several other ones besides that. I'm not sure what -- I'm not going to share anything more than what you've shared.

Because you have the $1 billion IDIQ for the Army directed requirement with the Switchblade 600. And then you mentioned how you were down selected for the Switchblade 400. And so there could be something there. I think there's other opportunities potentially with Freedom Eagle. There's probably other opportunities with Golden Dome. And so yes, I was just wondering.

Yes. I mean, literally, the list of programs and requirements that you saw that Church had in one of his slides, and I encourage you to go look at those again, has opportunities for MRR, LRR, LOCUST, Titan, the whole family of Switchblade, launched effects, Lasso. We have a broad list of programs. I mean it's pretty large. And he only highlighted a very subset of that, significant ones, a significant portion, but not all. There's a lot more.

Is there an expectation for like a big budget flush for this next coming 3 months? Like is because the procurement environment has been sluggish for the past year or 2. And -- but are things picking up? Is there optimism here? Or should we be more focused on the next fiscal year?

No, no. I think for this year, I mean, we're going to keep updating you. There's -- the biggest question mark is how fast the department is going to be able to pass the budget and also how fast they're going to obligate the dollars that have already been authorized and appropriated and given the keys to the spending.

And that is a function of resources and also coordination between OMB and the department because they still have to work that out. I do believe that there is opportunities there. There's no way that we could predict exactly when and how. We talk to our customers on a regular basis, regular basis. they don't even know how to predict it really well.

In some cases, within their own departments and the program offices, it's not easy because they depend on multiple sources of resources to be able to get a contract done, contracts, people, negotiation, funding sources, customer programmatic coordination and all that takes a lot. It's a complicated process, but I think there's -- predicting the timing is not easy. You should see more in '27, of course.

And the reason I'm asking is in terms of like the 2030 target, and it looks really juicy and appealing, but a lot of investors, like they're very impatient. And so they don't want to wait for 2030. They want to see like what's going to happen in 2028.

And like do you have the visibility in terms of like over the next 3 months, like if there is that budget flush, should 2028 be a rebound year such that like the organic growth rate would be closer to that 15% to 20% range versus, I think it's in the 7% or 8% range or 6% to 7% to 8% range this year. And so should there be like a bounce back in 2028?

You must assume that if fiscal '27 is about 10% top line growth, that organic growth, that the outer years has to be more in order to make the full 2030 number to be 15%, 20%. We do expect that to be. Exactly when at what time, really hard to predict, but I think that we are in a very good position. And I mean we -- as you guys mentioned, we have a very attractive odds of return and value creation here in my view.

I firmly believe that. It's -- and I think that is that the last question? I believe it was the last question, if I'm not mistaken. To add to just finish the point on that, there's no question where the market is growing. There's no question that we're in the right categories that is getting a lot of investments. There is no question that you see from our portfolio and investments that we've made and the success that we've built upon that we're uniquely qualified to be a significant player and winner in these opportunities and markets.

And there's no question in my mind also that we have the track record to back that up and say what we do and we deliver on that. And the last thing I would say is I have no doubt in my mind that we get the best leadership team in the industry. Okay? We are very diligent and very deliberate on those decisions. We've built a world-class team. We've got the right opportunities.

And I think we put a very compelling sort of story and strategy and investment thesis that I think is quite attractive, best-in-class, and we will keep you updated, and we look forward to sharing our progress and successes as we go forward. So with that, I want to thank all of you for being here, and I invite you -- we have some food and lunch outside, and I'd like you to please join us and welcome, and thank you again for your time.

Good day, and thank you for standing by. Welcome to the AeroVironment Fourth Quarter and Full Fiscal Year 2026 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded.

I would now like to hand it over to our first speaker, Denise Pacioni, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, ladies and gentlemen. Welcome to AV's Fourth Quarter and Full Fiscal Year 2026 Earnings Call. My name is Denise Pacioni, Head of Investor Relations for AV.

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 statements 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 Investors 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, June 29, 2026. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Joining me today from AV are Chairman, President and Chief Executive Officer, Mr. Wahid Nawabi; and Executive Vice President and Chief Financial Officer, Mr. Sean Woodward. We will now begin with remarks from Wahid Nawabi. Wahid?

Thank you, Denise. Welcome, everyone, to our fourth quarter and full fiscal year 2026 earnings conference call. I will begin by summarizing our quarterly and full year performance, followed by Sean, who will review our financial results in greater detail and then discuss guidance for fiscal year 2027. After this, Sean, Denise and I will take your questions.

I'm pleased to report record fourth quarter results across several key financial performance metrics, delivering AV's strongest financial performance to date. We reported fourth quarter revenues of nearly $642 million with increased funded backlog of $1.2 billion, strong adjusted EBITDA of $140 million and bookings of $572 million. For the full fiscal year, we delivered revenue of nearly $2 billion, ahead of our most recent quarterly guidance and in line with our initial guidance from about a year ago, and bookings of $2.7 billion. Full year adjusted EBITDA of $286 million came in above the high end of our most recent guidance range. And non-GAAP EPS was $3.31 per share, well above the higher end of our guidance.

With demand for our solutions continuing to rise, our work over the past year has positioned AV as a stronger, more resilient and diversified company. Before outlining several opportunities and key growth drivers that will help us reach our strategic goals for fiscal year 2027 and beyond, let me first cover some key highlights from the fourth quarter and full fiscal year 2026.

First, we achieved record fourth quarter revenue of $642 million and record full year revenue of nearly $2 billion. Organic revenue growth for the quarter was 31% and 30% for the full fiscal year. Second, we delivered strong fourth quarter adjusted EBITDA of $140 million or 22% of revenue on higher sales volume, demonstrating AV's profitability potential with increased volume.

Third, we developed and launched several new products, won several key program awards and made strong software advancements that will strategically facilitate growth for AV and to the future. Fourth, we successfully diversified our portfolio with the transformational acquisition of BlueHalo, nearly doubling in size and adding additional capabilities in counter-UAS platforms, space technologies, cyber and advanced solutions. And fifth, looking ahead, we're establishing fiscal year 2027 revenue guidance to between $2.125 billion and $2.225 billion. Adjusted EBITDA guidance for fiscal year 2027 is set between $305 million and $325 million.

Our confidence in fiscal year 2027 is grounded in the momentum we built this past year and the significant wins we have achieved across our platforms. In lethal drones, we introduced several new products, including Switchblade 400 and Mayhem 10. Our new one-way attack solution, Red Dragon, was awarded several contracts, and we're preparing to bring additional Switchblade production online at our Salt Lake City facility at the beginning of next calendar year.

Our nonlethal drones reached several successful milestones as well. AV P550 was selected for the U.S. Army's Long-Range Reconnaissance program. JUMP 20-X secured multiple contract awards, and VAPOR CLE won a significant award for the U.S. Army's Medium-Range Reconnaissance program. In counter-UAS, orders for our Titan family of RF detect and defeat systems more than doubled this year, while demand for this differentiated solution continues to rise. And our LOCUST laser weapon system achieved a series of key milestones that are setting the stage for significant future contract awards.

These wins reflect the core strengths that AV is set apart from others. We believe there are several important differentiating factors that best position AV to capture a significant portion of the anticipated rising demand in our served markets. We have a strong installed base that is unrivaled across several of our product lines. For decades, our customers have confidently relied on AV to deliver best-in-class solutions while giving them an advantage over our adversaries. Our solutions are battle-proven in today's critical conflicts. This dependability, along with our ability to quickly scale manufacturing, differentiates us from many of our competitors, especially new entrants.

In fiscal year 2027, we are investing additional capital to further increase our manufacturing capacity across several products and platforms to meet anticipated rising demand. We are sensing strong customer indications that our solutions will receive significant contract wins in the next 12 to 24 months. AV is very well positioned for these unprecedented levels of demand in our served markets.

Now I will turn to segment performance for the quarter and full fiscal year. Our Autonomous Systems segment, or AxS, continues to drive revenue growth for the company. During the fourth quarter, AxS contributed $492 million or 76% of total company revenue. And for the full fiscal year, AxS contributed $1.3 billion or 69% of total company revenue. This is a strong validation that our solutions are well positioned for the current needs of our nation's and our allied across -- allies across the globe.

Our Group 1 through 3 uncrewed aircraft systems operating group won several key awards during the quarter and made progress on several key initiatives. For example, AV's VAPOR 55 CLE unmanned helicopter was awarded a nearly $15 million U.S. Army company-level UAS directed requirement tranche 2 production contract. This is a significant win, and we believe it opens the door for additional future long-term awards for the medium reconnaissance program.

Just after the quarter closed, our P550 Group 2 drone was awarded a $117 million contract by the U.S. Army under the Long Range Reconnaissance or LRR program. We believe that these 2 key contract wins will help set AV up for future contract awards on a large program of record within the U.S. Army.

In addition to these successes, our Group 3 [ medium ] UAS solutions, namely JUMP 20 and JUMP 20-X, continue to make significant strides both operationally and with new demand. Our JUMP 20-X successfully demonstrated 2 special missions in Yuma, Arizona, and is deployed in support of Operation Epic Fury.

Our precision strike in defense subsystems operating group continues to drive growth for the company. During the quarter, our loitering munitions team made significant progress in several strategic areas of the company. For example, the Switchblade 400 received a key award from the U.S. Army for its Low Attitude Stocking and Strike Ordinance, or LASSO program. Built specifically for this program, the Switchblade 400 combines the compact attributes of our Switchblade 300 with the warhead capabilities of a Switchblade 600.

Also during the quarter, we debuted our latest multi-role [ launched effect ] system, AV's Mayhem 10, which is built on the foundation and success of our Switchblade family of products. Designed for the U.S. Army's [ launched effects ] program of record, Mayhem 10 has the ability to fly autonomously and has a versatile forward payload option that can accommodate lethal and nonlethal payloads up to 10 pounds.

Our Mayhem 10 addresses a significant capability gap for the U.S. Army. It can be launched from the ground and maritime conditions or from a manned or unmanned aircraft. These unique features positions Mayhem 10 as a very compelling solution for the future needs of our customers.

Slightly over a year ago, we announced our one-way attack solution, Red Dragon. Red Dragon most recently received a $17 million production contract for the U.S. Army during the fourth quarter. We anticipate significant increased demand for this product and are expanding production levels to ensure we can meet our customers' anticipated needs. Progress continues on our Salt Lake City manufacturing facility, which has the potential to produce more than $2 billion worth of Switchblades or other AV products per year. We're on track to begin production in the spring of calendar year 2027.

As a reminder, 2 of our counter-UAS products we acquired with BlueHalo reside in this operating group. Our RF jamming detect and defeat family of counter-UAS solution, Titan, continues to play a critical role in the company's growth. In fact, Titan sales more than doubled this past fiscal year on a pro forma basis. We expanded production rates during the fourth quarter and anticipate demand for this product to rise through 2027 and beyond.

In addition to this counter-UAS offering, we're also making progress on our Freedom Eagle-1 or FE-1 program with the U.S. Army, which, as you may recall, was awarded a $96 million contract last fall for the U.S. Army's Long-Range Kinetic Intercept program. We are progressing on that development contract and moving towards flight testing in approximately 12 months. This program represents close to $1 billion of market opportunity for AV over the next several years with an even larger opportunity in the years that follow.

We're among one of the very few new missile producers in the last 30 years, and are confident that our cost-effective solution will be well received by our customers. The momentum behind this program is building, with Congress increasing funding to accelerate production due to a gap in low-cost missile production. Given these demand signals, this past quarter, we announced efforts to expand our manufacturing facility in Huntsville, Alabama to scale production of this groundbreaking capability in anticipation of increased demand.

We're also seeing increased traction in our Space, Cyber and Directed Energy segment, which represents an important new phase of AV's multi-domain growth strategy. This segment reported revenues of $150 million for the quarter and $619 million for the full fiscal year. Despite some near-term disruptions during the third and fourth quarter due to the government shutdown and SCAR contract termination for convenience, we remain very optimistic about several opportunities within this segment, including directed energy counter-UAS, long-haul laser communications, space technologies and other advanced solutions.

During the fourth quarter, our LOCUST directed energy counter-UAS platform achieved several key milestones. As global threats continue to evolve, directed energy has emerged as an essential and cost-effective solution for countering high-volume, low-cost drone attacks. At under $10 per shot, the LOCUST flips the cost advantage between offensive and defensive systems and provides the warfighter with an unlimited magazine. We believe our LOCUST directed energy solution is a game-changing capability which is at the very early stages of a large and strong market adoption cycle.

Building on this foundation, we introduced LOCUST X3 during the fourth quarter. One of the critical differentiators that sets LOCUST apart is that its modularity allows detection [ in the feet ] while on the move onboard a ground vehicle or ship. The precision with our ability to pin and track is what makes LOCUST as accurate when targeting adversarial drones.

In parallel, a demonstration aboard the USS George H.W. Bush validated LOCUST in an operational maritime environment. During this exercise, our LOCUST system was able to shoot down incoming drones with a 100% success rate, showing that our laser weapon systems can protect ships against drone threats. This is an unprecedented level of success with such laser weapon systems on real maritime operations. Our Army and Navy needs this capability desperately, and we're aggressively expanding its manufacturing capacity to meet this demand.

Additionally, in early May, the FAA cleared the way for directed energy systems such as our LOCUST to operate in domestic national airspace to protect critical assets in the homeland. The LOCUST laser weapon system is included in our offering to the U.S. Department of War as part of the nation's Golden Dome program. Our proposed system, called Halo_Shield, includes other AV counter-UAS solutions such as Titan SV and Titan 4 to work in conjunction with LOCUST as well as our AV_Halo software ecosystem to protect critical assets from drone threats, which includes swarming attack scenarios. We look forward to providing additional updates on this important initiative. We're confident our LOCUST laser weapon system provides a solution for our customers on the modern battlefield.

We recently announced a $30 million investment to significantly expand manufacturing operations in our Albuquerque, New Mexico facility. We're preparing to transition LOCUST to full rate production this year, and we expect significant demand for this product line on several fronts.

In addition to counter-UAS, we have also made strides with our long-haul laser communication terminals. It's worth highlighting that we were awarded a $240 million contract last fall for our long-haul laser communication terminals, one of the largest awards on record. These terminals will be deployed on orbit for critical national security missions.

Subsequent to the quarter closing, the U.S. Department of War selected AV for a $43 million contract through its Test Resource Management Center to integrate our phased array next-generation telemetry hypersonic emitter receiver or PANTHER product, on DoW's SkyRange platforms. The award reflects our growing strategic position within the DoW.

Looking ahead, we intend to invest in our BADGER and Wasp phased array antenna technology platforms by developing a more commercialized solution that will compete on the U.S. Space Force's upcoming program as well as look to broaden our offering to other commercial customers. This past quarter, our Cyber & Mission Solutions business received a $20 million contract to advance ceramic materials research for the U.S. Air Force and Space Force. The $20 million contract represents a vital investment in technologies that will preserve America's advantage across air and space domains by advancing next-generation ceramic materials and manufacturing processes that enhance mission readiness, extend operational endurance and strengthen the technological superiority of the air and space forces.

In addition, this group also received a $25 million award from the Air Force Research Laboratory to mature human health and performance technologies for warfighter readiness. We're continuing to expand our AV_Halo software platform and recently announced 2 new modules: AV_Halo INSTINCT, which provides an autonomous software framework; and AV_Halo DETECT, which delivers autonomous RF detection in contested environments. Today, they enable our customers to deliver synchronized autonomy, faster decision-making and more effective mission execution. We remain highly confident that continuing to invest in our leading platforms is the best path to keeping our advantages in our dynamic industry and to drive long-term value creation.

Before turning the call over to Sean, let me summarize with the following comments. We delivered record financial performance in fiscal year 2026 with strong revenue growth, expanding profitability and increased backlog, demonstrating the strength and scalability of our business. Demand across our portfolio remains robust, supported by a growing pipeline of awards and $2.7 billion total year-to-date bookings, positioning us for continued growth in fiscal year 2027 and beyond. And we continue to invest in our highly differentiated solutions, which enables us to continue our strong growth and value creation trajectory.

With that, I would like to now turn the call over to Sean Woodward for a review of our fourth quarter and full fiscal year 2026 financials. Sean?

Thank you, Wahid. Before I turn to our results, I want to address the incremental goodwill impairment charge of $89 million and the related restated third quarter 2026 results which we disclosed last week. This was an incremental charge related to the termination for convenience of the SCAR program. This was a noncash charge and had no impact on previously reported current assets, current liabilities, revenues, cash used in operating activities or our non-GAAP adjusted EBITDA or adjusted EPS measures. In addition, it does not relate to updated estimates of the long-term cash flows used in the goodwill impairment analysis.

The full year results we are discussing today reflect the corrected impairment. In connection with the restatement, we identified a material weakness in our internal control related to the preparation and review of the goodwill impairment analysis. We have implemented enhanced controls and review procedures to strengthen this process.

Now I will walk you through our fourth quarter and full year performance and fiscal '27 outlook, referring to our press release and earnings presentation available on our website. I will briefly comment on our results for the quarter and then turn to guidance for fiscal year '27.

Fourth quarter revenue reached a record $642 million, representing a 31% organic growth year-over-year, our strongest quarterly growth rate of the year and a 30% year-over-year increase on a pro forma basis. This performance was driven by exceptional demand across several of our key franchises, including Switchblade loitering munitions, Titan counter UAS, Red Dragon one-way attack and JUMP 20 Group 3 tactical systems. With nearly $2 billion of revenue in fiscal year '26, AV remains one of the largest and most profitable defense technology companies. Our leadership rests on a diversified portfolio of proven systems, manufacturing excellence and next-generation capabilities.

Turning to the quarter 4 results. We secured bookings totaling $572 million in new authorized contract value. Our book-to-bill ratio for the quarter 4 was 0.9x, reflecting the exceptional quarter 4 revenue performance, partially offset by some timing delays of anticipated large program awards, while our trailing 12-month book-to-bill ratio stands at 1.4x. Funded backlog closed at $1.2 billion, unfunded backlog at $1.5 billion, which now excludes SCAR contract values following the contract termination for convenience announced in March.

Slide 7 and 8 of the earnings presentation shows the fourth quarter and full year revenue by operating group for each of our 2 segments compared to pro forma fiscal year '25 revenue. The Autonomous Systems, or AxS segment, recognized $492 million in revenue in the quarter, which represented a 49% increase over fiscal year '25 pro forma revenues. The Precision Strike and Defense Systems operating group led with $333 million in revenue in the fourth quarter, which represented an 80% increase over fiscal year '25 pro forma revenues, driven by strong sales in our loitering munition Switchblade family, one-way attack Red Dragon and counter-UAS RF Titan products.

Uncrewed Aircraft Systems operating group grew 17% year-over-year, led by JUMP 20-X, Puma and P550. The Space, Cyber and Directed Energy segments generated $150 million in quarter 4 revenue, down 8% pro forma year-over-year, reflecting the SCAR termination in March and the U.S. government funding delays that disproportionately affect Cyber and Mission Solutions operating group.

Within the segment, the Space and Directed Energy operating group sales grew 23% year-over-year, driven by strong demand for LOCUST directed-energy counter-UAS systems. SCAR related revenue was $31 million during the fourth quarter, totaling $121 million for full fiscal year '26. Cyber & Mission Solutions revenue declined at 26% pro forma, primarily due to discontinued programs and funding delays from the government shutdown.

Moving on to gross margins. Slide 14 shows the adjusted product and service gross margins, including reconciliations to GAAP gross margin. Fourth quarter overall adjusted margins -- gross margins were 34%, the highest quarter of fiscal year '26, and 730 basis points above quarter 2 low, demonstrating strong sequential trajectory. This is lower than 40% in the fourth quarter of fiscal year '25. As noted on prior earnings calls, the business composition of the combined new company has changed significantly with higher service mix, increased flexibly priced contracts and several products in the early stages of maturity.

Quarter 4 adjusted product gross margins were solid at 44% due to the strong finish of the year in terms of sales volume, whereas quarter 4 adjusted service gross margins were lower at 2%. The reason for the decline in quarter 4 service margins was related to our Cyber and Mission Solutions business in which a service contract funding was delayed, and within our Precision Strike and Defense Systems business, which experienced a onetime forward loss [ and EAC ] revision related to a legacy BlueHalo contracts following the organizational indirect rate alignment tied to our integration strategy. Full year fiscal '26 adjusted gross margin landed at 30%, in line with our original guidance.

Moving on to operating expenses. Adjusted SG&A, which excludes intangible amortization and deal and integration costs, were $72 million versus $37 million in the prior year. The increase is the result of the combination with BlueHalo. As a percentage of revenue, adjusted SG&A in the quarter was 11% of revenue versus 13% in fiscal year '25. Full year fiscal '26 adjusted SG&A was 13% of revenue, down from 17% in fiscal year '25 and in line with our projection, reflecting BlueHalo synergy realization and operating leverage at scale. Quarter 4 R&D expense was $31 million or 5% of revenue compared to $25 million or 9% in the prior year. Full year fiscal '26 R&D totaled 6% of revenue, down from 12% in fiscal year '25, as projected.

In terms of adjusted EBITDA, Slide 15 of our earnings presentation shows a reconciliation of GAAP net income to adjusted EBITDA. Quarter 4 adjusted EBITDA reached $140 million or 22% of revenue, more than doubling from $62 million in the prior year quarter, driven by BlueHalo accretion and strong organic growth. This represents significant margin expansion from 11% in quarter 3.

Full year fiscal '26 adjusted EBITDA totaled $286 million, exceeding the high end of our revised guidance range with a 14% margin. AxS segment adjusted EBITDA was $289 million for the full fiscal year '26 with 21% adjusted EBITDA margin, reflecting strong revenue and gross margin contributions. This was partially offset by SCDE segment adjusted EBITDA, which was negative $3 million following lower revenue and the resulting underabsorption of fixed costs in both the [ Space Car ] program and the Cyber Mission Solutions business.

Now turning to non-GAAP earnings per share. Slides 13 and 16 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. Adjusted EPS reached $1.84 in quarter 4, up from $1.61 in the prior year quarter. Full year fiscal '26 adjusted EPS was $3.31, above the high end of our guidance range and compared to $3.28 in fiscal year '25.

Moving to the balance sheet. At the close of the fourth quarter, our total cash and investments amounted to $713 million, a $65 million increase versus quarter 3 of fiscal year '26. AV total debt composed solely of 0 coupon convertible notes was $747.5 million and a net leverage ratio of 1.2x adjusted EBITDA. Cash flow rebounded in quarter 4, with $73 million of free cash flow driven by strong operating performance throughout the quarter. This marks AV's first positive free cash flow quarter since quarter 1 of fiscal year '25.

During fiscal year '26, working capital needs scaled with revenue growth, and our cash conversion cycle was extended in part by the acceptance testing process of our Switchblade products. During quarter 4 of fiscal year '26, we've worked closely with the U.S. government to streamline the Switchblade acceptance process. We believe this procedural improvement will shorten our cash conversion cycle and improve working capital efficiency going forward.

Turning now to backlog. Funded backlog totaled $1.2 billion at quarter end, with $869 million or 73% attributable to the AxS segment and $314 million or 27% to the SCDE segment. Unfunded backlog finished the year at $1.5 billion, which now excludes $1.5 billion related to the SCAR program, with $1.25 billion or 86% attributable to SCDE and $209 million or 14% to AxS. It's important to note that our unfunded backlog figures exclude ceiling values from sole-source IDIQ contracts, such as the remaining balance of the $990 million U.S. Army Switchblade contract and the remaining balance on the $874 million UAS and counter-UAS FMS contract. These contracts, amongst others, represent significant additional contract capacity beyond our reported unfunded backlog.

Turning to fiscal '27 guidance. Before I walk through the numbers, I want to emphasize that we manage our business on a full year basis. Given the nature of our contracts, award timing and customer acceptance testing can create significant quarterly variability that does not reflect the underlying business performance. We encourage investors to focus on our full year guidance and multiyear trajectory rather than quarter-to-quarter fluctuations.

I also want to frame our fiscal '27 outlook in the context of deliberate strategic investments we're making to capture long-term market expansion. We're accelerating commercialization across our product portfolio, expanding international sales capacity and building production infrastructure to meet rising global demand for autonomous systems. We expect that these investments will drive revenue and EBITDA growth of approximately 10% year-over-year.

With that context, on Slide 9 of the earnings presentation, we provide our fiscal year 2027 guidance. As Wahid mentioned in his remarks, fiscal year '27 revenue is expected to be between $2.125 billion and $2.225 billion or 10% growth at the midpoint of our fiscal year '26 results. This excludes any SCAR-related revenue. Adjusted EBITDA is expected to be between $305 million and $325 million and non-GAAP adjusted EPS between $3.02 and $3.34. Near-term non-GAAP adjusted EPS remains relatively flat year-over-year due to the higher anticipated depreciation and cloud amortization expense from the significant capital deployed in fiscal years '26 and '27. Depreciation and cloud amortization expense is projected to increase by approximately $37 million or 77% year-over-year.

A few details on the revenue cadence, adjusted EBITDA profile, along with non-GAAP EPS distribution. We expect revenue to be stronger in the second half of fiscal '27 as we anticipate increased booking and order activity prior to the current government fiscal year-end. We're planning on our approximate 45-55 revenue split between first half and second half. Given we anticipate the uptick in orders to come through the latter part of the summer, we anticipate revenue in the first quarter to be 45% of the total revenues for the first half.

Following this revenue cadence, we expect adjusted EBITDA to be 1/3 first half and 2/3 second half of the year. This is similar to the fiscal year '26 results from a distribution perspective. We anticipate first quarter adjusted EBITDA to be 1/3 of first half totals, reflecting improved sales mix and higher sales volume in the back half of the year. Non-GAAP EPS is anticipated to be 25-75 first half, second half distribution. This reflects the adjusted EBITDA profile and the impact of depreciation expense. First quarter non-GAAP EPS is expected to be 25% of first half's total.

To accelerate these efforts, we're investing between 7% to 9% of revenue in research and development and 12% to 14% of revenue in CapEx, primarily focused on production capacity expansion. Adjusted SG&A expenses are projected at 14% to 16% of revenue. The year-over-year increase in adjusted SG&A as a percentage of revenue reflects strategic investments in sales and business development resources to support our expanding international footprint and commercial pipeline, as well as infrastructure to scale the combined organization.

In summary, fiscal '26 was a milestone year. We achieved nearly $2 billion in revenue, exceeded our revised adjusted EBITDA guidance and demonstrated the power of our diversified portfolio with 31% organic growth in quarter 4. As we enter fiscal '27, we believe we have strong momentum across our product lines and a robust $2.7 billion of total backlog. We expect that the production capacity and R&D investments we're making this year will position us to scale with the accelerating global demand for our lethal and nonlethal drones, along with our suite of counter-UAS solutions, markets where we hold leading positions and where we see multiyear tailwinds driven by the evolving threat environment.

Now I'd like to turn things back to Wahid.

Thanks, Sean. We are encouraged by the strong level of funding for our opportunities and priorities in the defense budget. That said, the timing of that funding, particularly given the reconciliation process, remains uncertain. As a result, our revenue guidance reflects that we're not assuming funding arrives early in the government fiscal year 2027. As stated earlier, we are initiating our fiscal year 2027 revenue guidance between $2.125 billion and $2.225 billion, with adjusted EBITDA guidance between $305 million and $325 million and adjusted EPS of $3.02 and $3.34 per share.

In closing, we're very pleased with several results from this past quarter and the full fiscal year 2026. We delivered a record fourth quarter in a solid fiscal year, capping a transformational year for AV. We secured a series of marquee program wins, including LASSO, LRR, MRR, LRKI and received several additional orders for franchise programs such as Red Dragon and long-haul laser communications, each representing opportunities that could be more than $0.5 billion in revenue for AV over time.

We remain focused on execution, including advancing a more commercially oriented approach across the portfolio while aggressively expanding capacity and scaling manufacturing to meet a growing demand that will drive profitability. Taken together, record financial results, a pipeline of significant and growing opportunities and the manufacturing capacity to deliver on them, the long-term opportunity for growth and value creation has never been stronger for AV.

We hope you will join us at our Investor Day on July 8, where we will outline our growth priorities and long-term goals in greater detail. I would like to thank our employees, shareholders and customers for their continued commitment to AV and our mission.

And with that, Sean, Denise and I will now take your questions.

[Operator Instructions] Our first question will come from the line of Sheila Kahyaoglu from Jefferies.

Maybe one positive question and one just cleaning up item question. So I guess on -- as we -- Wahid, you talked about counter UAS, it's 1 of your 4 growth pillars. Can you size the business today and how you think about the growth profile of that? You mentioned LOCUST achieving key milestones.

And then just to clean up, can you just touch on the goodwill impairment? You disclosed the additional -- you restated it last week. How do we think about the $1.2 billion left on the balance sheet? And if you could help bridge us as we look forward to '27 as it relates to SCAR?

Thank you, Sheila, and good afternoon. First of all, I'll take the first half of that question. And then the second one, I will yield it to Sean to respond to. In terms of the -- our counter-UAS strategy and business and growth prospects, today, we're in the early stages of this counter-UAS adoption cycle. We have a very crisp and clean strategy on a layered defense approach to counter-UAS or defending against drones.

We don't believe just in 1 solution set or 1 technology, we have a multilayer solution set and approach to it. First, we offer the world's -- one of the world's best RF jamming and detect systems called the Titan series of solutions. That business doubled over last year, and it continues to grow. And I think we're at early stages of adoption on that. Would say it's roughly about a couple of hundred million dollar business in the counter-UAS in general for us as a company in fiscal '26.

The second layer of defense for us is our directed energy solution, which is literally on its early, early inception phases of adoption. We are aggressively expanding manufacturing, and we believe that directed energy is going to be a significant portion of the market opportunity for counter-UAS globally. The cost and economics, it basically flips in the -- in favor of defensive systems against drones, and that gives the U.S. a major and our allies a major advantage.

And lastly, we also have been awarded a contract, as I mentioned in my remarks, for our Freedom Eagle-1, which is a kinetic [ defeat ] system, it's a category of missile that is a significant gap not only in the U.S. Army, which this program is starting at, but in our entire military. Our entire military has a gap, and a size of a missile that can actually take down Group 1 through 3 drones cost effectively at way, way less, a fraction of the cost of standard missiles. Most missiles that are being used today are in the millions of dollars. This is going to be targeted to be in $100,000, $150,000 a copy when we're done with it, and we're making significant progress on that. And Congress is asking us to accelerate that.

So I strongly believe -- if you recall, Sheila, 4, 5 years ago, our loitering munition business was a small business. Small, low double-digit numbers, $10 million, $20 million, $30 million. And we're now at about $0.5 billion business, roughly in that in terms of growth. It will not surprise me in the next 3 to 5 years that our directed energy and our counter-UAS business would be equally as large if not 2x to 3x bigger.

That opportunity is ours to have. We're executing on all those 3 fronts. We're making significant progress. Our customers are very happy with our solutions, and we're looking forward to updating you on our progress in the future.

And Sheila, related to your second question around the impairment and the goodwill, let me just highlight a few points related to that. First, the impairment was related to the previously announced stop work order and termination for convenience on the SCAR BADGER program. The impairment did not result from changes in the cash flow projections of the space reporting unit. The impairment did not result from any new events or additional negative business trends.

The additional impairment was filed due to an error in the Q3 calculations in which an estimated allocation of goodwill associated with the acquired tax attributes were not included in the measurement of goodwill impairment for the space reporting unit. As disclosed in our 8-K we filed with the SEC, the error was detected by management. A third-party accounting firm was engaged to prepare the Q3 goodwill impairment analysis.

The error in the third quarter by the third party was identified by management, detected and corrected in the fourth quarter. Additional internal controls have been implemented and were executed in Q4 to prevent this potential for future errors. These controls will need to be tested for additional quarters in order to remediate the [ SOX ] control error.

Related to the overall goodwill in the Space and Cyber Directed Energy business, it's $1.2 billion. And the remaining of that is $291 million associated with the Space business unit specifically.

[Operator Instructions] Our question will come from the line of Seth Seifman from William Blair -- sorry, Seth Seifman from JPMorgan.

Yes. Thanks very much, and good afternoon. Wanted to clarify a little bit about what you said about the timing of revenue and referencing the reconciliation. I guess, which reconciliation were you referring to? And if it's -- I think there's a fair amount of funding in last year's reconciliation, and that, that could kind of proceed from here and probably started to become helpful in the last quarter. And to what extent are you depending on another reconciliation bill to drive expectations for this year -- for fiscal '27?

So generally speaking, as you know, the government fiscal year '27 starts in October. And we currently, based on all the indicators that we see, we're assuming that there's going to be a continuing resolution, and a full defense budget will not be passed on time at the beginning or before the beginning of the next government fiscal year.

The best estimates that we have put together based on industry experts and our own experts inside the company is that probably, we'll see a budget approved sometime December or January of next calendar year. And so if that were to happen, the customers' accounts and the services, U.S. Army, Navy, Air Force, et cetera, they're probably not going to see those dollars until March time frame, roughly. And so which means that there's going to be a delay in the government fiscal year '27 budget, which there is significant dollars, significant. When I say that it's significant, it's unprecedented amount of dollars for the type of systems that we make and we're positioned for.

So from now until literally this year, we're going to be living off of our current very strong backlog, but also the funding dollars that have been approved before that is making its way into contracts and acquisition and awards up until the end of this calendar year. We still expect a growth year. And if the situation were to change positively, obviously, we will update you. And our goal is to be as close to the pin as possible given the information that we have.

And again, we strongly believe that the long-term prospects for growth is strong. That's why we're investing in our manufacturing capacity expansion on several products. Half a dozen of our products are scaling significantly because we know that these capabilities are needed desperately, and we know that our military is very pleased with our systems, and we're going to get a fair share of that spend over the next 12 to 24 months. However, the timing of that is not very certain and in the next 3 to 4 months.

Got it. And then maybe just to follow up the investments that you mentioned. It's a pretty significant step-up in CapEx, and I think you talked about some of the drivers of that. Where do you expect free cash flow to come in for the year?

Yes, great question. Significant investment we're making in fiscal year '27 CapEx, between 12% and 14% of our revenue. That's going to be really production capacity growth CapEx. We believe that's going to help fund the Salt Lake City facility, as Wahid mentioned, our Huntsville facility build-out. There's additional expansion in Albuquerque as well as in Dayton, Ohio. So multiple production capacity sites being expanded to support our long-term revenue growth potential.

From a free cash flow perspective, we're not expecting fiscal year '27 to be positive on free cash flow given the amount of CapEx that we're planning on spending during the year.

[Operator Instructions] Our next question comes from Louie DiPalma with William Blair.

Wahid, Sean and Denise, there have been many discussions regarding the Department of War looking to quadruple production of exquisite missile systems such as the PAC-3 and [ TAD ] and precision strike missile and others. I mean, you've been ramping capacity at your Salt Lake City facility. Does the Switchblade or even the Freedom Eagle have the potential to be excluded as part of this exquisite missile system category? And related to this, 2 years ago, you won the $990 million Switchblade 600 IDIQ. Do you view the Switchblade production as -- or should it be increasing, like with or without that category of exquisite missile systems?

Thank you, Louie. Obviously, we feel very bullish and very optimistic about all of our lethal, call it, drones and missiles solutions. That includes the Switchblade family products, Switchblade 300, 600, 400, and Mayhem 10. It also includes our Red Dragon one-way attack. It also includes our Freedom Eagle-1. So overall, I feel quite bullish that this category, irrespective of exquisite or non exquisite, is going to get significant funding, number one.

Number two, the categories that we're in, these are the categories that is going to get probably the highest percentage of growth of funding compared to the previous years because they're starting with much smaller numbers in dollar sense. And for that specific reason, we're actually expanding manufacturing in literally all 3 of those product families. We're significantly expanding the manufacturing of our loitering munitions, as you know, in our Salt Lake City facility. That's an additional $2 billion worth of production capacity a year. And that's going to come online at the beginning of next calendar year, basically this winter.

Second, we're expanding aggressively -- we already expanded, but we're going to continue to expand further the Red Dragon family of one-way attack drones. We have secured several contracts, and we expect a lot more contracts and awards on that in the next 12 months.

And lastly, our Freedom Eagle-1, as I mentioned, we've already secured about $100 million worth of contract awards from the U.S. Army to accelerate that program. And Congress actually added more money to that to accelerate it even further. And we're working diligently not only to accelerate the development and testing of that capability, but also to actually expand manufacturing with the investments we're making on the Huntsville, Alabama facility. That facility is specifically targeted to produce the FE-1 platform. And I feel very good about it because our product is meeting all of our customers' requirements so far, and it's doing very well.

So overall, Louie, whether exquisite or non-exquisite, I really don't know which way it's going to go. But I would argue that this category of our systems is going to get a significant amount of funding over the next several years, not just next year, but it is going to continue to grow and be a bigger portion of the pie of the spend for the U.S. government on missiles in general because they are way more effective in lots of different missions than the current traditional solutions that are out there. Which we still need as a nation because they're generally just depleted heavily. But our category is going to do really well, in my view.

Definitely. So you're confident of -- that there will be funding for the production ramp like regardless of the characterization? And that some investors believe that there's almost a competition between -- like the high-end missiles versus the low-end missiles. And yes, we're just looking for a sense of what is your visibility in terms of the increase in CapEx and having like production orders associated with that increase in CapEx.

Yes. So a significant portion of -- or a meaningful portion of, I should say, of our CapEx spend this year is on expanding production capacity across all of our platforms. And obviously, our lethal drone category, which I just described, is a very sizable portion of that portfolio. So we are investing aggressively in this area because we expect this category to grow.

I don't believe that the large, exquisite, expensive missiles is genuinely competing for dollars related to the loitering munition or one-way attack drones. This is an expanded category and new sets of missions that really did not exist before, the Ukraine conflict and the conflict and the Initiative Epic Fury.

So I don't think that we're going to suffer from lack of funding in these categories because the government is investing, we're buying more of the exquisite missiles. Our nation and our allies across the globe need more of all of these things. because the inventories are depleted, and the U.S. capabilities are desperately needed to expand and grow in these categories significantly.

Our next question comes from the line of Andre Madrid with BTIG.

Maybe, Sean, maybe this one might be best tailored for you. I mean, just -- can you call out what organic growth is implied in the FY '27 outlook? Maybe put a little bit differently, how much is ESA -- [ ES Aero ] expected to contribute?

Sure. Thanks for that question. So overall, we're expecting to the midpoint of our guidance range, about 10% year-over-year growth. We don't really provide breakdowns below that. But overall, we're expecting 10% year-over-year growth. [ ES Aero ] contributed, from the time of acquisition to the end of fiscal year '26, around $20 million for fiscal year '26 totals.

Got it. Got it. That's helpful. And then I wanted to dive a little bit deeper into Cyber and Mission Systems. It seemed like in the quarter, there were some funding delays. That was flat quarter-over-quarter, down year-over-year. I guess, when we think about the long-term prospects of this business, when might things start to turn around? And I guess, what are your expectations for it longer term?

So Andre, I'll take that question. Look, we -- when we acquired BlueHalo a year ago, approximately a year ago, we were really, really -- the main thesis for the acquisition was the majority of the portfolio that we are making significant progress. And -- but we also care about the cybersecurity business because it gives us a lot of advantages in the marketplace and have synergies with the rest of our products.

That business over the last year has been affected significantly by two things: the government shutdown that we had because a lot of that is basically employees that are being deployed on site with our customers; as well as the fact that the government had a DOGE effect. If you recall, at the beginning of the year, there was a significant impact on that in terms of reduction on government services in general.

We believe that we have a very compelling solution set there. That business is a business that we would like to continue to grow. We do believe that the market is now sort of stabilized, and we expect that business to slow -- to grow slowly. It is not considered the highest growth area of our portfolio. But that's the beauty of our business. We have diversified our portfolio and our business significantly over the last 24 months or so. We do not rely on a single customer, single program, single product, single business unit for us to be able to achieve our growth and our value creation targets.

We remain very bullish on this. Our portfolio is robust. We're in the right categories of the defense budget and the national defense strategy priorities. Our allies need it. We've got a track record of success. We know how to do this, and we're going to continue to execute as we've been doing before. So if you look at our track record over the last decade, you'll see that while our portfolio keeps evolving, we tend to be able to deliver on our promises and our plans successfully over time really well.

Our next question is from Michael Leshock with KeyBanc Capital Markets.

Just given the various platforms that you're in the process of ramping aggressively, do you feel like the supply chain is prepared to support that level of growth? Just curious, where you see the biggest potential bottlenecks today? Or are there any changes that you've made from a supply chain perspective to support your production ramps?

Thank you, Michael. The short answer is absolutely, yes. We're not only just expanding our manufacturing footprint ourselves. Part of the CapEx investment and initiative that we have within the company this year to significantly ramp up several platforms in the multiples in terms of growth targets at capacity-wise is to work with our suppliers to expand the number of suppliers and also help our suppliers increase their throughput.

And we've made significant progress, number one, over the last several years: A, B, we're continuing to keep investing in that and actually addressing those sort of bottlenecks and areas that needs more attention and more expansion. But I must add the following comment. Relative to our competitors in the market, we are one of the best when it comes to this because we've got 2 decades of track record of success, knowing how to scale production effectively, reliably and profitably. We have done that over and over and over again by tens of thousands of units a year so far, and that is unmatched in the entire industry.

While we focus on expansion and growing our industrial base and working with our suppliers, we're way above and shoulder ahead of our competitors in this area. It's actually one of our competitive advantages against almost everyone in the marketplace. So it's always going to be a challenge because we're growing, and we've got a large supply base and we have a diversified portfolio. But we do way better than all of our competitors in this area, in my opinion. And I think we're going to continue to focus on that and keep growing our gap in this area against our peers.

Great. And then maybe following up on the Space segment. Could you talk about the impact of the growing number of satellite constellations that are being and are expected to be deployed over the coming years? I'm just wondering if there's opportunities for AV to perhaps act as a merchant supplier into these satellite programs, like optical comms or other components? Is there any way to frame that satellite opportunity over the longer term?

Absolutely, Michael. That is certainly an area, as I mentioned in my remarks earlier, that -- we're quite bullish. I'm very bullish on our space and cybersecurity business in general. And the reason is because we're still early stages of a very large adoption cycle with some highly, highly differentiated technological solutions. Right? Technologically, our phase arrays is unmatched really in the industry. So is our optical laser communication terminals that we have demonstrated the ability to do way better than anyone else, and we've secured a $0.25 billion contract last -- this past fiscal year.

I believe that business is very early in its infancy. The vast, vast majority, if not all of the satellites that we have in LEO, MEO and geosynchronous orbits around Earth are going to get upgraded with the capability of long-haul laser optical communication. That is an expertise that AV is uniquely qualified and is a significant player in the market. It's just that the market is still early. And we believe that as the adoption continues, that we're going to do better and better as the time goes by. A, B.

Related to the merchant supplier to many of these programs, yes, we are actually actively looking at those things and those programs, and we're engaged with multiple partners to be able to actually provide some systems there and some capabilities to our customers. It's a little bit early, but as we make progress -- and some of these are sensitive programs as well. And I'm not in a position to be able to talk very openly about it. But we're making very good progress, and I believe that we're on the right track.

Our next question is from Peter Arment with Baird.

Wahid, the Unmanned segment has always had a lot of foreign military sales activity. Could you give us the latest kind of what you're seeing from a bookings environment, particularly just given that we're seeing a lot of volatility around U.S. domestic kind of timing and budgets? How are things looking from an FMS perspective?

And absolutely very positive, in my view. As you said, you've known us for a long time, and our international franchises for these products is a significant portion of our revenue generation and value creation strategy. It's been part of our strategy to continue to win programs domestically and then expand internationally.

We've done extremely well on our nonlethal drones category over the last decade or 2. And then the last 3 to 4 years, we've really expanded the Switchblade category significantly. But the rest of our portfolio, things such as our one-way attack drones and our FE-1 platform and our LOCUST laser weapon systems and even I would say our P550 and our Titan series even, we have significant potential for growth in terms of the -- both DCS and FMS spend and opportunities internationally.

One of the key areas that we're investing in fiscal '27 in terms of SG&A is international expansion to have better presence in these markets based on requests and signals that we're getting from specific countries around the world. I recently returned from a trip from Asia Pacific. And the demand for our solution is quite, quite compelling and strong. And we need to keep investing, and it's expanding our presence to be able to support those customers. And I think that's going to start to pay dividends over the next several years for AV quite handsomely.

Got it. And just as a follow-up, Sean, on the 2/3 of adjusted EBITDA in the second half of the year, could you just give us a little more color on that? Is that just volume and mix? Or is there anything else to call out on that?

Yes. Thanks, Peter. Yes, the second half of the year, we're expecting to have the 2/3 of our total adjusted EBITDA. As the sales volume picks up in the back half of the year, the volume and the mix should be more favorable, resulting in a higher adjusted EBITDA in the back half, similar to what we had in fiscal year '26.

One moment for our next question that comes from Jonathan Siegmann with Stifel.

Thank you, Wahid, Sean and Denise. Maybe just on margins, can you help us bridge fiscal '27 versus '26? I know there's a fair amount of puts and takes, and I appreciate you calling out the changes in SG&A and higher ad, but any other color you can give on that would be helpful.

Sure, Jon. Yes. So overall, we're expecting next year's adjusted EBITDA between $305 million and $325 million, which is essentially 14.5% at the midpoint, similar to our fiscal year '26 ending results, but we're able to increase the overall R&D investment between 7% and 9% and SG&A between 14% and 16%. That increased investment is going to come from improved adjusted -- our gross margins from our product sales and overall services mix that we're going to have in fiscal year '27.

And our next question is from Pete Skibitski with Alembic Global.

I guess first for Sean, can you quantify for us, the impact -- you said you took a onetime charge on a BlueHalo contract in the fourth quarter. It was a negative [ EAC ] adjustment. I guess it was a services contract. I don't know if it was Titan or something else, but if you could quantify that, that would be great.

Sure. Yes, there was a onetime adjustment in 2 parts of the business. Our CMS business had a contract that was not awarded and we had expenses incurred that we posted in fiscal year '26. And then there was an indirect rate realignment that took place which has resulted in a forward loss and onetime EAC adjustment in our Precision Strike and Defensive Systems business. Those are onetime only events.

Our next question is from Clarke Jeffries with Piper Sandler.

First one for Wahid. I was just wondering if you could give us sort of an overview and some context for the Q4 result in precision strike? It seems like the tone has been over the last few quarters that some of these contracts might have been languishing in the contracting process in the government's hands. Just wanted to sort of assess that and where we stand in terms of the sort of throughput? And then also maybe you could dig into that customer acceptance testing part, some of the improvements there? And is that applicable across all blocks and SKUs of Switchblade or even the entire portfolio? And then one follow-up.

Sure. Thanks, Clarke. So our Precision Strike and Defensive Systems really is one of the shining sort of business groups or groups of businesses that we have that is performing incredibly well not only in fiscal '26, but we expect it to perform really well in '27 as well. We believe that, again, our momentum in this area is very strong. You heard Sean earlier talk about the different sole-source IDIQ contracts that we have, the tune of $1 billion each. The government still has options to actually either extend the time frame of those contracts or increase the ceiling of those contracts to make room for more awards as a result of that.

In one of them, we are getting close to like 2/3 or 3/4 fulfilled, so to speak. But the government has options. And we know that our solutions are working and our customer is happy with them, and they want us to keep continuing to build them.

Another indicator that's really important is that last fiscal year, the U.S. Army also funded us to actually increase the production of our Switchblade 600 Block 1. And we're now at the historic levels of production of that product. We have the capacity to produce literally several thousands of those a year now. And so we're prepared to get these contracts and then convert these contracts into revenue as soon as we get them as we're ramping our production.

Besides loitering munition though, I must say also that I feel very bullish on our Red Dragon family, one-way attack. That is much earlier in its adoption cycle. We are also ramping that up, and we won several contracts this year -- this past year. And so I expect that to continue to grow. And it would not surprise me if that was a very significant portion of the revenue of that category over the next couple of 3 years because it's the capability and the mission sets that the Red Dragon family of one-way attack long-haul product addresses is quite unique and compelling.

And then lastly, our Freedom Eagle-1, it's really at its infancy. We're just developing the product, going through testing. And Congress has even funded it to expand and accelerate the rate of testing and development and expansion, which we're actively doing this year. So in all 3 of those categories, we expect growth, and we expect adoption to continue and the government funding as well as international allies to continue to buy more of those for us. I believe you're going to continue to see positive announcements and results from us and that in the several months ahead of us in the future.

Our next question comes from the line of [ Kashi Keller ] with BNP Paribas.

I guess for Sean, congrats on the appointment to the CFO role. I know you're not a newcomer to AV, but now that you've been in the CFO role for a little bit now, what have been some of your early learnings? And are there any areas or anything we should expect to be different under your leadership?

Yes. Thanks for the question. As you mentioned, I've been here for 16 years. So I know the company very well. Very fortunate to be able to take this opportunity. Worked well with Wahid for the last decade plus very closely and really excited for this opportunity. I plan on continuing with our growth projections and growth momentum, assisting Wahid and our new Chief Operating Officer, Rob, on making decisions on our capital investments in research and development and what markets we're going after and continue with our overall expansion efforts over the years to come.

Our next question is from Trevor Walsh with Citizens.

Great. Wahid, maybe for you, you mentioned Mayhem 10 in your prepared remarks. Could you maybe just give us a little bit of a double-click there around how that product is going to be differentiated from Switchblade in terms of, I guess, maybe the opportunity set that you're going after? And do you -- it sounded like you -- that was designed specifically for an Army contract, but I would imagine other components probably have a need there. So -- and then I guess along with that, is the ramp that you saw in Red Dragon maybe similar to what we could maybe expect from Mayhem 10 as you kind of push that out to market?

Sure. Thank you, Trevor. So as you know or you may have noticed in my remarks, Mayhem 10 is built on the foundation of our Switchblade portfolio and product line. It is really the next-generation capability, but it's purpose-built just like the other Switchblade that we've introduced in the past, for a specific requirement and program for the U.S. Army and other customers that we've had.

The U.S. Army has a program called [ Launch Effects ]. And in the [ Launch Effects ], the idea here is that while Switchblade 300 and 600 are what's referred to as a weapon system or a [ loitering ] munition for dismounted troops on the go, this Mayhem 10 allows it to be actually integrated on all other types of platforms, unmanned airplanes, manned airplanes, helicopters and ground vehicles and even ships. So we've designed this product to be essentially very compliant with the common launch [ tube ] that U.S. Army refers to as a common launch [ tube ] that essentially enables them to mount this to any other platforms as a weapon system.

That opens up a whole new area of opportunities for us in the loitering munitions category. And then we purposely designed this for that. In addition to that, it has a few other features that -- you can have different payloads, whether it's lethal or nonlethal for other types of missions inside the product, too.

I do believe that we're positioned well. We're focused on that [ Launch Effects ] program. We are engaged with U.S. Army, but I do agree with you that there is -- beyond the U.S. Army, there's applications and demand for this and a need for this with lots of other customers, both domestically and internationally. It is a little bit early. It's really dependent on the U.S. Army's pace of progress on that program, but we're very focused on it like we have always been on other programs, and we're going to continue to update you on our progress.

On the other product you mentioned, Red Dragon, we are ramping that up. And I do believe that Mayhem 10, hopefully, as we get down selected and if we get down selected over the next several months, to make progress. I mean, we have prepared ourselves for these scenarios. We constantly work that as part of our strategy and our execution plans for operations. And our factories are very capable of switching between different models if we have to base on customer demand. And that's inherent to our product design philosophy and our manufacturing readiness programs.

Our next question is from Gavin Parsons with UBS.

I know quarter-to-quarter, super lumpy, but if I'm doing the math right, it implies first quarter will be down year-over-year. Anything specific behind that?

Yes. Gavin, thanks for the question. We try to provide that level of color in our prepared remarks. We have the stop work on SCAR is leaving around a $30 million hole, as well as some of the order timings coming through later this summer that we expect to ramp up the back half of fiscal year '27. So we're just taking our time to really think through what the distribution of revenue will look like given the lack of the SCAR revenues coming through in the first half there.

One moment for our next question that comes from the line of [ Brian Dobson ] with Clear Street.

So as you're looking at the BlueHalo portfolio, I guess, what products are you most excited about? And how do you expect I guess, demand for those products to ramp over the next several years? What are you really looking for?

Thanks, [ Brian ]. So for me, it's always very difficult to pick favorites between our products. I consider them like our kids. And it's really hard to do a favoritism towards one of the other because they all have their own unique value propositions and position in the market.

But if you were to ask me in terms of real potential for game-changing capabilities, BlueHalo already is contributing significantly, for example, to our RF jamming and detect systems in the counter-UAS category with our Titan series. That is one of the fastest-growing products in our entire portfolio as a combined entity. And it's one of our more profitable products, if not the most profitable product lines that we have. So BlueHalo has done a fantastic job on that.

Very close second to that would be the LOCUST laser weapon systems. The LOCUST laser weapon system is at the infancy, as I said in my remarks, of its adoption cycle. I personally believe that, that's $1 billion to a multibillion-dollar market opportunity over the next 5-plus years. And I think that we're at the cusp of that inflection point this year. There is a very important program of record that the U.S. Army has called EHEL or Enduring High-Energy Lasers. And we are anticipating a decision on that.

We're competing on that program. It's supposed to be based on the Army's announcements about a $0.5 billion program in size, total. And they have so far indicated that they are going to announce that and award that in the next few months. That is going to be an inflection point because it's the first of its kind program of record in the U.S. Department of War's basically, history on a production level laser weapon system.

And it's a holy grail. It's a whole new category that is going to be created as a result of it. And we all know the threats and the kind of demand that there is for defending against drones at low cost and with unlimited magazine. And I would also point out two other things real quick. Our laser communication terminals is one of the best, if not the best in the world, and we're the leader in that space. That's also a tendency.

And then lastly, the Freedom Eagle-1. We are now entering a new category that AV historically has never played in, truly being a full-up round missile producer. And we're ramping that up today this year. We're investing significant dollars on production and manufacturing. And we're aggressively tackling the testing and validation phase because the U.S. Army is pushing us really hard to go faster, and we are. And it's going to be at an unprecedented like sort of speed of -- from the time that we started on this program until we're going to get to production, it's nearly like 2 years or so. That's unprecedented in missile categories in the history of the department.

And so we're pleased with that because I think it opens up a whole new category for us in the long run. And I'm really bullish about that as well. So you can see it's really difficult to win -- to pick which one is going to be best. They all have their own strong profiles of value creation, and we're very happy with them.

And our last question comes from the line of Austin Moeller with Canaccord Genuity.

So just my first question here. I understand you think that the regular defense budget probably won't be passed until probably the winter or into the new calendar year. But if the up to $350 billion reconciliation bill is passed before the midterms and we see more demand from a contracting perspective for uncrewed aircraft systems product sales in the mix, how should we be thinking about the gross margin potential that we could see in the fiscal year if that occurs?

Thank you for the question. And you've actually caught something really important in this discussion, which is besides the regular budget, there's also a reconciliation bill in front of Congress which has historic dollar -- amount of dollars, in the billions of dollars, as you mentioned, for primarily a lot of the categories that we're the leader or one of the key, key players in the market and providers in the market.

So the range of outcomes there, Austin, is very wide and quite favorable in many ways. But it's really hard to count on the timing of that. The best indicators that we have that, that is also going to be delayed given the election cycle and given how the Congress is engaging themselves and the bills and in the approval of the budgets.

So we are cautiously optimistic. Long term, we're going to do really well. But first quarter, second quarter, it's really hard to predict that because it's really difficult to know exactly when these budgets are going to pass. So we're not really assuming that some of that is going to come through.

If that situation changes positively, of course, we're going to update you. And it will have a positive impact. We believe that it should and it could have a positive impact both on top line revenue and on the profitability profile because we're producing these things and our margin profile on these are really good and our pricing is quite competitive in the market. And so we look forward to hopefully you being right, and that's an area coming to fruition and keeping you guys updated.

Thank you. And this will conclude the Q&A session. I will turn the call back to Denise for final comments.

Thank you once again for joining today's conference call and for your interest in AV. 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.

This concludes our conference. You may now disconnect.

So Wahid and Sean, thank you for joining us. We've got Wahid Nawabi. Is that right?

That's right.

And Sean Woodward. Wahid's a CEO. Sean is a CFO of AeroVironment. So thank you for making time today to talk with us.

Thank you.

Thank you for having us. Yes. And for those that don't know, Sean is the new CFO of AeroVironment. So welcome, aboard.

Thank you. Looking forward to working with you, yes.

So maybe just a broad question to start. How is business?

Busy as heck. Good, busy. There's a lot of dynamics going on in our industry. They -- we're ramping up production. We had a -- I can't talk about the specifics of Q4 because we're in a quiet period, but it's a very critical quarter for us. We must execute and deliver. We're going to share those results and outcomes in a month or so -- 1.5 months, 2 months. And -- but besides that, there's a lot that's going on in the industry in general. As you know, the budget dollars that were appropriated and authorized late January, early February, that is just making its way to the Department of War, and a lot of those are going to be obligated in the contracts. So last month or so, plus the next 3 to 4 months is going to be very busy in my view, for us.

And then right after that, there's a lot of discussion and attention on fiscal '27 budget, the $1.5 trillion and a step function massive increase in our areas, which is the autonomous systems, the wars of drones, basically, they're asking for about $75 billion worth of funding to spend in the areas that we're like the #1, #2 player in every one categories of those things. So busy. And then at the same time, we're trying to ramp up production. We're trying to support the U.S. government on active conflicts that are going on in Ukraine as well as in program or the initiative called Epic Fury, the Persian Gulf. And then, of course, there's an emerging potential threat that's happening in the Pacific that U.S. has to get ready. So we don't have time for any leisure activities.

Maybe quickly, how are you thinking about -- because you mentioned the $70 billion, how are you thinking about the Defense Autonomous Warfare group and what that means? And does that change anything?

Yes. So I believe this is part of the department's strategic goal to consolidate the decision-making for these areas into one bucket of funding, number one; and two, on one authority that can drive strategic decisions on allocate where the gaps are, how to prioritize those things, and how to execute against them. Still, majority of the execution is going to happen within the services and the program offices and contract -- of contracting offices that is designed to support the Army, the Navy, the Marine Corps, but the [indiscernible] we've been involved in very heavily, they are incredibly active in a lot of different areas that directly relates to our stuff.

And it's, I believe, as under Secretary or Deputy Secretary, Feinberg's vision and intent to try to have this realignment and focus and direct line of responsibility and authority to be able to execute and command and drive vision. And we support it. It's been very, very -- actually, I think it's a good change that is going to hopefully help move things faster in the next 12 months.

Got you, got you. And when we think about -- you mentioned your current kinetic events going on in the world like Ukraine, Iran. It does seem like one of the things, at least that speaks to me that's come out of Iran is the vulnerability of civilian targets to unmanned systems. So can you speak to what that means for AeroVironment in terms of an opportunity and -- yes.

So I mean, this is like our moment, if you ask me, the reason why because 4, 5 years ago, every military leader you met within the building or outside the building or in the world, they thought I need more F-35x airplanes. I need more aircraft carriers, I need more tanks, I need more armored vehicles. And that's been the story of defense for the last multiple decades. These two conflicts have shifted the paradigm dramatically. Ukraine basically put an exclamation mark that you've got to deal with drones that are armed, and how do you defeat -- how you make a lot of them, and how do you defeat them. And then now the conflict in Iran, where U.S. is actively involved and the other one where we're indirectly involved, in this one we're directly involved, has shifted the paradigm even further because we thought, okay, they may have like 20 or 30 or 50 of these Shaheds, but there are in thousands, thousands of them. And who knows if Iran can do thousands and thousands, China could probably do hundreds of thousands if not millions.

And so we don't have the capability to; a, defeat that many, and do it at in economic way. And so the war of drones has become now the defense against drones in the counter UAS world. And these areas are the areas that we're the #1 or #2 player in the world. And so we're positioned phenomenally well. And I think this story and this strategy is going to continue to gain more momentum in terms of spending dollars, being more aligned towards these capabilities because U.S. doesn't have it. And I can give you several examples of the areas that we play in.

That would be great.

Yes. So first of all, if you look at our portfolio, it's a very diversified portfolio of first non-lethal drones. So we're the #1 player in the world on group 1, 2 and 3, which is by far the lion's share. A Group 1 is small quadcopter, the DJI size, all the way up to Group 3, which is a Shahed drone. We are the leader in small UAS and medium UAS. Our JUMP 20 system and JUMP 20-X is the world leader. We have won 7 consecutive program records internationally in the last 12 months alone. These are 5-, 10-year programs that our European allies are coming to us, and they're actually procuring these systems. We compete, and we won every single one. We lost 1 out of the 8, and that was because of our own fault, we submitted a non-compliant bid. But the other 7 we won. And then we get into the lethality systems, this is loading munitions such as Switchblade and our one-way attack drones such as Red Dragon and Dragon Family. And then the latest product will be announced called MAYHEM, and the Switchblade family.

That, we're the world leader. We're the largest producer of these systems in the world, and we're the dominant player there as well. And then on the counter U.S. side, we have a layered approach to the solution set. We do not believe that there's a one solution that fits all. There's going to be a layered approach to defending against these drones. And the first mechanism is RF jamming. We have the world's best RF jammers that is the most successful, the most predominantly used one in Ukraine as well and called the Titan series. And we -- that business is doubling every year literally. And that's one, so you apply that. But Shaheds are actually immune to that. Then Chinese drones are going to be immune to that because they don't have RF signals. And so then you have to go to the next layer, which is the most economical, it's called the directed energy laser weapon systems. We've got the world's best performing, most reliable directed energy system called the LOCUST series.

And we announced our newest product like a couple of months ago, called the X3. X3 is basically putting a system on top of a Stryker or a JLTV that allows you to go -- you'd be driving down the road, you can detect the drone, and you can defeat the drone while you're driving. And the key milestone for that is the first ever historic program record for the U.S. Army called E-HEL, emerging or emergent high-energy lasers. They need to make it -- they are planning on making a decision within the next 30 -- 90 days, and that will be the first ever production level program record for our laser weapon system in the U.S. military's history, and we're competing for that. So that should open the floodgates. And then the third layer for us is a kinetic kill. So if you can't defeat it with jamming, you can't defeat them with laser weapon systems, then you're going to use a missile or kinetic kill like a Switchblade.

That is not the cheapest. And the solution that U.S. has today is only one. The solution that we have is every time a Shahed comes to us or something smaller than Shahed, we use a $2 million to $3 million missile. And we're depleting our inventory of missiles that's supposed to be used against in -- ICBMs and big airplanes and other things. So we have a program of record that we're competing with the U.S. Army called NGCM, that is the next-generation counter U.S. missile. There was two players, it was us and RTX, and we were down selected. We were awarded the contract. We're now going to be delivering 80 somewhat systems. It is the first ever missile that is going to be developed specifically to a target in the FE Group 1 through 3 drones. And it's going to do it at a fraction of the cost of a missile. It's in the $100,000, $150,000 price target, not $3 million target. So our solution set, as you can see, it's a very layered approach. We're focused on the long-term war, not the short-term battles, and we're making sure that we progress in every single category as we go forward.

And I mean, if we can just maybe pull on a string a little bit more. How do you think about civilian targets? Because something that jumped out at me was when the Burj got hit. You have this high-profile civilian target. Is there a world, and I don't want to like -- kind of get to out there, but where every single high-profile civilian target has some sort of protecting system.

Absolutely, there's a scenario. And I firmly believe that I hope it doesn't get to this. It's very unfortunate -- it we would be very unfortunate, there's a real catastrophic event. You talk about Olympics, World Cup, music festivals and NFL games. We were on an airplane, the story, NFL now has no major baseball league has a person who is looking after how do I protect stadiums and gatherings against drone attacks. So they're just starting, hiring one person to lead this effort within the entire MOB. And that's going to happen in all these places. And most likely, the most obvious solution -- so first is Golden Dome, which is about military sites and clinical infrastructure for national security, and it's domestic mostly. But after that, it's going to be every nuclear power plant, every hydroelectric dam, every water sanitation site, every stadium, every musical festivals, data centers.

These sites are all going to have to be protected because 3 or 4 people can cause a lot of havoc internally. And so you may not see an X3 high-energy laser, but you will see definitely a Titan jamming system. And at the lower end, you probably see a 5-kilowatt smaller-size LOCUST system installed at these clinical sites. The market for that is basically tens of thousands of sites, not 100 sites. And we're kind of getting ready and positioning ourselves for that. The biggest hurdle there going to be just regulations. And I have one piece of great news where the U.S. Department of Defense and FAA just announced that our product LOCUST has been now proven to be safe and operationally deployable domestically. That was a major announcement that just came out literally last month or two. And that's going to most likely open up doors for the adoption of these things in the next couple of years.

Got you. And then maybe switching to Sean real quick. As you've come up to speed on the company and started talking to analysts and investors, is there anything that jumps out at you that are potentially misconceptions people have about the business and the business model?

Oh, yes. Great question. Looking at the portfolio that we have right now and the key products and franchises that we have current and soon to be rolling out, I think just the understanding of the market sizing for that and the ability for us to bring these to market and win is not quite understood. And we've done a lot of communications, a lot of explaining of what the new portfolio looks like, but I think we're going to continue to hone that message. And ultimately, I think that's where looking at the models, we'll be able to see further growth and adoption of these commercialization strategies and the key franchises that we acquired.

And maybe as a follow-on, and maybe just you haven't seen it enough yet, but is there anything you want to change in people's models where if you see an outside model, you're like, that's just not right. Like is there anything that jumps out at you like that?

Yes. I think just looking at the ability for us to deliver and grow profitably has been undervalued from a multiple perspective compared to our peers. You look at a lot of our peers, the multiples are much more favorable, and they're losing money, or they're just starting up with the ramp on volume. We've been doing this for years. We understand what it takes to bring products to the market and be successful in it. And we think our multiple is really kind of undervalued.

Got it. Got it. And then, Wahid, how are you thinking about the balance between the smaller UAS and larger ones and procurement priorities. Yes, and maybe I might add on that, I'll make it a more complicated question. And then how do you reconcile that with some of the other competitors in the market, and the Europeans you're getting in this market.

Yes. so I mean, we've been competing with the large primes and small start-ups our entire history and existence. I've been with the firm for over 1.5 decade. And there's not been a single year that I don't go to a conference or to an event where there's not the concern about how do you guys going to compete with startups? And how do you compete with VC-backed companies. If you recall, the drone -- commercial drone insanity that happened like 10 years ago. We started counting actually companies, it was over 1,500 of them. And I tend -- I look around now, we stop counting because there's so many. And all of them shifted to defense. We're not going to make money here, that we're going to find a market in the defense market. I think 1 or 2 is still in existence, and they are still not profitable, and they still haven't reached any level of scale whatsoever.

So that's the fact about the last 30 years, a. B, we are the model that most of these companies are copying essentially, the business model of investing in R&D, developing products rapidly, the disruption -- disruptive capabilities and bringing it to market and scaling is what they really all want to do. So that's not a surprise. The third thing is the market is growing so fast and so -- becoming so big that there's room for more places. And it's obvious it's going to attract more investments because the investors look at where the puck is going, and there's a lot of money to be made here, and that's why they're doing it. And -- but what differentiates us is exactly what I said and Sean said, which is there's one thing that Elon Musk says that I really believe in. 10% of the effort is doing a prototype, 90% of work is when you do trying to scale that in thousands of units. How do you scale to deliver reliable quality product and thousands, if not tens of thousands, over the long term. There's a lot of work to be done there. And I have this debate with our engineers all the time because they're done, they're not done. There's a lot more work to be done to be done.

And that's something that nobody can match with AV. If you look at small drones, we've got the largest installed base of small drones in military ever, 55,000-plus systems. If you look at our number of customers, 55 allied nations besides United States, every branch of the U.S. military. We are the dominant player in these categories, and we've been the #1 since the beginning. Production capacity on all these categories that we mentioned, we are in full rate production in 8 or 9 of these 10 products. And we're making it now in volume, and we're already in 2nd gen, 3rd gen, 4 gen product, every single one of them, right? Puma 3 3rd generation. The current Puma is like -- nothing like the original Puma, everything inside looks different. So we have an advantage there. So -- and the last thing I'd say is our technology stack is incredibly a huge differentiator too. We designed 90% of our subsystems ourselves. We design our structures. We design our motors. We design our autopilots. We design our autonomy package, we design our ATR package. We design our propulsion battery packs even gimbals.

So having the ability to stack up the technology and optimize the performance of the drone allows us to beat competitors when it comes to the program of record competition. Because then a little difference here and there makes a huge difference on the outcome. I had an investor call or meeting earlier and somebody said, we have a Group II drone called P550, and there's a competitor. There were the 2 down selects on the Army program record call LRR. But pound for pound, our product outperformed significantly. And the program record selection is going to most likely reflect that. And we'll see who's going to be the winner, but that's how we also keep a differentiation between us and everyone else. We welcome competition. It allows us to stay competitive and on our toes. But most of our worry is not competitors. Most of our worry is making sure that we execute on our plans and the budget dollars flow so we can go deliver.

I mean, just maybe tangent to that, is there an opportunity as the market grows, and if there's room for other players to be a merchant supplier. Like for example, your gimbal, doesn't it? Could you sell them to somebody else who needs gimbals or your motors because I know getting motors domestically can be tricky, right? A lot of that comes from Asia, right?

Yes. So the answer is absolutely yes. In fact, we are doing that today in some areas. Initially, we got into these things because nobody else was producing them or manufacturing them or designing them. There was no such company that made motors for a military-grade drone. So what you could buy was an RC helicopter or airplane drone, a motor or servo or whatever. So we designed these things ourselves. Now there are players that make subsystems, and they're making them for us too, but we do still design them. Lastly, I would say that we are currently doing that in some areas already. For example, if you look at our ground control station, we bought a company 5 -- 4, 5 years ago called Tomahawk Robotics. The concept behind that is that U.S. Army has got a program record called HMFI -- HMIF, human machine interface formation. Essentially, if you're a soldier, you're going to have multiple robots, ground robot, 2 or 3 drones, loading munitions. You don't want to carry 5 different controllers and radios and battery packs.

You want to carry one, you would be able to control and communicate and operate these. So they competed this program, and we competed and Anduril and other was on the competitor, we won. And we now are providing that as a solution to a variety of different drone manufacturers. In fact, we shipped more of that product with our competitor drones and robots than our own. And the goal is obviously to stay agnostic there. Gimbals we've thought about. Gimbals is a little bit more tricky because you have to be involved in the design phase of the product itself, unless you get to our larger sizes. But certainly, that's another area. There's areas of even propulsion, motors and others that we could do that. We've been so busy making products and producing to fulfill our own needs. We haven't had the need to go beyond that, but that's definitely going to be the case going forward to some extent.

Got you.

Yes. Last thing, I would say, if you don't mind, sorry. On the autonomy and computer vision, we're currently integrating our autonomy packages, basically the brains of the drone and a variety of our competitors, not only just drones, but USVs, UUVs, UAVs of many of our competitors today. It's because it's the best performing. And we believe in a very modular open systems architecture, so you can swap any of our subsystems with anyone else's, whether it's hardware or software, it's doable today, and that's how we build the architecture.

And truly open system because you hear an open system gets thrown a lot by some players that maybe aren't really open system, but they say they're open system.

Yes. Well, the best -- I completely agree with you, right? An open system, there's a spectrum of openness to where you are. The best way that open system is being implemented in my view, truly being open system is what the U.S. Army is doing called, MOSA. MOSA is a very robust effort by the U.S. Army to develop a strategy on how to develop product from ground up that is compliant with open modular approach, where the interfaces are standardized, you share that with the customer, you disclose that, they have that. And any time if someone else has a product that meets that requirement, it could be swapped in and out. And P550 was designed from the ground up to be 100% MOSA compliant, and it is today.

In fact, every module is swappable. Switchblade 400 and MAYHEM designed from the ground up to be 100% MOSA compliant. We did not go and tweak the product to become MOSA compliant. We designed it from the ground up to be that -- be such in that way, yes. And so very much similar things can be said about JUMP 20. JUMP 20 airplane has 60-plus gimbals and payloads integrated into it. None of them are AV's own payloads. They're all third-party payloads, whether it's a gimbal or EW or a laser designator, we use a variety of different vendors' products that we are -- they're flying in the military customers today. And so we firmly believe in that and that's open. Now if you ask me, is the radio on our device completely open, there's only a certain level of openness that we can share there. At the subsystem level, it's completely open modular.

Got you, got you. And then, Sean, another question for you. What lessons has the company learned from the acquisition of BlueHalo. So my guess is that probably a little more bumpy than...

Yes. We're one year in now. It's been one year since we closed. May 1st of last year was our closing date. I've been part of the company for almost 16 years. I've been part of every M&A that we've done up to this point. Every other one was a tuck-in or a bolt-on. This one was transformational, and we were very aggressive with that. We were intentionally taking parts of that business and reorganizing ourselves in to do operating segments, to ensure that we have the product capabilities, the go-to-market, the synergies of our technical teams working together to really set us up for the way we wanted to be projected in the next few years. That was a lot of effort to go under. We were doing that at the same time that we're rolling out a lot of digital infrastructure changes in our own legacy company.

So a lot of people changes, tool changes, process changes, but we did it intentionally and aggressively. So lessons learned is we're building on this. We're going to continue to be acquisitive. We're going to find other targets. And we are creating playbooks even more ahead of the plans on how we're going to roll people into the company. But this was kind of transformational, the BlueHalo deal.

Is there any change that how you're thinking about when you diligence an asset?

We go through diligence on many different companies every year. We assess the contracts. We assess their pipelines, all the normal diligence, we do QAVs. We look through all that. I think we have a pretty robust process there on the diligence side.

Yes. And I think one of the strengths of having Sean in this role is because he's got 15 years plus of experience with AV is very aware and knowledgeable and deep into the business processes that we have. The digital transformation that he's referring to, we have basically gone massively invested in our ability to upgrade our ERP system to Oracle Fusion. We are the -- basically the poster child of Oracle when it comes to Oracle adoption Fusion for aerospace and defense industry. And we're on our -- we're now starting Phase III. We've already done the Phase I and Phase II. And so that's -- Sean's been instrumental on that. There's a lot of lessons learned in this area, as you mentioned -- he mentioned. But we're not doing this slow. We're doing it to build that 180 company long term that is truly, truly integrated, diversified and it's got automation and a lot of what I call business process improvements in most -- in almost all the processes.

Got it. So kind of back to the beginning of where we're talking about the [indiscernible], right? The way the budget process is coming together for fiscal '27, it seems kind of complicated. Right now, there's talk of a third reconciliation. If reconciliation doesn't come through and a lot of the funding for [indiscernible] is in that, how do you think about that? What does that mean for you guys? What does it mean for the industry?

Sure. I'm not an expert in this area, but we have experts within our company that knows us really, really well because they come from the Pentagon and from the legislative branch. Essentially, what I see is the following. So I'll share with you what I believe based on what I've learned. And I think the department is trying to consolidate the decision-making in a lot of these areas. That's why they've taken a whole bunch of line items from a variety of different programs and line item budget and putting it all into one big bucket called the autonomous systems, drones, unmanned, $75 billion. The likelihood of them getting that money is very high. If they get it all in one bucket or not, I don't know. So the reason -- the question is why do they get all of that put into one bucket. And the reason that has to do with the fact that the secretary and secretary under secretary, deputy secretary, Feinberg, would like to have direct oversight and decision-making authority over what is being decided, and how are we moving forward with that decision, a. B, they really don't know what they're going to buy. They could be buying 1,000 Switchblade 300s or 5,000 Switchblade 400s or 2,000 Red Dragons. The number in these quantities of what flavor of what across the portfolio of all these systems is not really well known because they're developing requirements and playbooks as they're going forward.

And so their argument to the Congress is, I need to have some level of flexibility. And that is counterintuitive or anti the desire of the Congress. They would like to have line items specificity of what you buy, and why, and how many. And that is going to be a little bit of a battle between the department and the Congress. But overall, it is bipartisan support, both houses of Congress and the entire administration that we need to fund defense at a much bigger level. I think the $1.5 trillion is real, not unreal. And if they even get somewhere close to that number, it's a significant amount of money. Yes, and they're going to have a difficulty spending it fast enough rather than can they actually get the money. And you know that we already have a record of them having this problem. And what makes it even more complicated is that there is this election cycle coming up. And if Democrats believe that they're going to pick up some seats, and they're going to have control of one of the houses, that will incentivize them to just not cooperate right now. And I think the likelihood of a CR is probably not low, it's high. However, they can eventually get the money, I believe, because the need is there, the support is there, the question is how much, where and what form and when.

Yes, that makes sense. How -- when you think about the international demand. How durable is that? And how much do you worry about as Europe goes up as they invested in industrial base, and they build out their own industrial base, does that feed into your overseas sales. I mean, how do you think about the durability of...

I mean, you see from our track record, right, we're a poster child of a success story about being able to successfully become a real significant player internationally. In some years, before BlueHalo, 50% of our revenue came from international sales or customers and products. So we are very good at it. We've been increasing the number of countries. A, it's a legitimately significant part of our business. It's part of our diversified portfolio and customer base. And lastly, I do believe this whole European demand could be a little bit overinflated. If there is a recession, as we know, and the countries that are claiming they're going to spend as much money; a, they want to do it domestically to some extent. So they get to have a lot of incentives to make sure that companies like us become more local. And we -- that's part of our plan, we've been aggressively attacking that, and we continue to expand it internationally. But I believe that the demand might be a little bit overstated, too, it may not be realistically realizable for them. Regardless, again, the same scenario applies internationally is domestically.

The categories that we're in, it's not like buying more tax. It's buying the stuff that they have none of -- not money at all. And it's going to be a step function increase, even if they spend half of that much or 1/3 of the amount that they are claiming. And their problems are real. I mean the Russian, the threat in Europe is not going to go away. The Chinese threat in the Pacific is not going away. And both of those two theaters have got a lot of vulnerable countries that need to do something about their national security. And we are really good because the solutions that we make is phenomenally more affordable than getting another F-35 or a F-22 or something like that. And we not only fit the strategic need, we also meet the economic equation very effectively because they can get more stuff with our stuff.

I mean think about like JUMP 20, right, that's a great example. You can have a Group 4, 5 drone that cost $20 million, $30 million and the operating cost is massive, it's more vulnerable, and it requires a full runway to operate, and the infrastructure is huge, or you can have a drone that takes off from the back of a small little fast ship, that's JUMP 20, that flies for 10 to 20 hours. And that solution, it does 80% of the missions of the bigger drone. And it has lethality, it has ISR, it has EW, it's SIGINT, all these missions you could fly. And that's why JUMP 20 has been so successful because we knew that there's a sweet spot that addresses the problem very effectively. And so those solutions are going to become more and more relevant because that's most logical decision for a customer.

Fraction of the price.

Fraction of the price. Fraction of logistical footprint, so much easier to retrofit a ship to put that on board than a fixed airplane. Huge, huge advantages, safer, autonomy built in. And these things are things that we've been working on, knowing that this is -- this moment is going to end up happening eventually. And so that's -- those are the kind of examples that we're into.

And then maybe just as you wrap up here, a question for both of you. I mean how do you think about product development spending? I mean what -- for an innovative company, what is the right level of R&D spend? What is the right level of product development? What should you be spending? How should we think about that?

I would say this, there's always more demand and appetite for investments in R&D and company in our AV than have always been in the case. We have so much not only justifiable opportunities, but real legitimate cases. I think it's part of our success strategy in our business model. And this is why it's being copied by hundreds of companies if not thousands of other competitors now that are getting into the space, which is we've always believed in developing products at an agile space ahead of the requirements and delivering solutions to the customers' problems way ahead of even a problem record. And then working with the customer to tweak it to make it perfect for the solution. And that's how our franchises were born. Historically, we've been between 10% to up to 18% of revenue, as low as 8%, 9% as high as that. The BlueHalo acquisition brought the percentage down because the revenue went up and their R&D was much lower. We're like 7%, 8% now.

But I think 8% to 9%, 10% is where we're going to be. We intentionally are not increasing EBITDA margins as we grow because we're going to continue to invest because we don't want to miss out on the growth. There is a significant growth coming our way. We need to develop these products and bring them to market so we can capture the opportunities. And there's a dozen different billion-dollar programs that we're like the best contender for. And so that's why we're investing in things. We've been launching new products every quarter, if not more than 2 or 3 times a year. We've got to JUMP 20X. We've got Switchblade 400. We've got MAYHEM, we got X3, we've got Titan 4, these are all products that come out, 5, 6 products in the last 12 months alone. And that's where our money is going. We're winning programs with them, and we'll continue to grow our business. So I think that is not going to change any time soon in my view.

And say that, call it, 9%. How much of that is customer funded, and how much of that is just you guys, your spread equity?

So the 9% is 100% ours. Yes, if you add the customer-funded R&D on top of that, it will probably almost get to 15%. But our own money alone is about 9 -- IRAD, internal R&D, is about 8% to 9% a year. Exactly.

Thanks. We'll wrap it up there.

Thank you very much. Thank you for having us. Wonderful. Thank you.

Here we go. Good afternoon, everyone. Welcome back to the aerospace defense track at the JPMorgan Industrials Conference. I'm Seth Seifman, aerospace and defense equity analyst here at JPMorgan. We are very grateful to have AeroVironment with us, AV. And we have both CEO, Wahid Nawabi; and we have CFO, Kevin McDonnell, here with us. Guys, thank you very much. We appreciate you being here, and there's a lot of stuff that's kind of very topical for us to talk about.

So thanks for coming. Maybe we'll just do some Q&A here. And then I'll also open it up to the audience if anyone in the room has any questions. I guess we've had a lot to cover, but maybe starting off, it seemed recently that there was a little bit of slowness maybe in some of the funding that was was coming out, particularly from the reconciliation bill.

And I'm wondering now that the government has been back open for a few months, now that we're a little further into the calendar year, have you started to see more of those resources flowing? And when you think about what was in the reconciliation bill, where are the main opportunities for AV?

Yes. So thank you for having us, Seth. Yes, there were some delays primarily due to the government shutdown and reconciliation bill and the CR that happened throughout the whole year. The budget just got approved a little while ago, not a month ago or so. The dollars are still coming through from the approval process from the Congress to the OMB.

And from there, it's going to flow into the specific accounts of the services, Army, Navy, Air Force. We are starting to see some trickle of that. I think it's the beginning. In the next three to six months, I think we'll see a significant more uptick on the potential of orders coming in and contracts flowing down to us as well, A. B, in terms of the -- is there a lot -- or is there anything for AB in the reconciliation bill and in the budget? Absolutely. We're on some of the highest priority categories.

We're on the strategic categories in terms of both demand and importance. Those are things such as drones, Group 1, 2 and 3, loitering munitions, one-way attack, RF detect and defeat jamming systems, such as our Titan series as well as is obviously requirements now because of the conflict that's going on in Iran for directed energy LOCUST systems that could be a very significant player in the long run.

I also mentioned that persistent long-range, long endurance ISR, such as our Group III JUMP 20, JUMP 20-X is ideal for those types of needs that are out there in the market. So there's half a dozen of our products that are in production today. We're making them in quite probably largest volume in the industry. And we have the capacity to produce and we have the ability to actually deliver at a military-grade operationally relevant systems to the market as soon as the funding makes its way.

Okay. Okay. Excellent. Yes, you mentioned loitering munitions among the products that are in demand. Maybe if you could talk -- and loitering munitions product where AV was really a pioneer in the market. Can you talk a little bit about how you see that market evolving? I know people hear about loitering munitions being manufactured by several different companies. How do you think this market evolves in terms of how many companies can grow and kind of have a decent share in this market? And what distinguishes AV from the competitors?

So our history is exactly what you described. I mean these categories that we're the leader in and it's essentially categories in many cases that we've invented the category. The term loitering munition did not exist before, Switchblade. -- and Switchblade has become anonymous to the term loitering munition in the market, number one.

Number two, we've got the most proven technology in the market. We're producing in high volumes today at program of record level rigor and certification and safety confirmation levels for the loitering munition, and we're way ahead of everyone else in this category. The market, however, is large.

And as a result of the success of Switchblade and loitering munition, the lowest end of the market, probably the smallest part of the market is this FPV drones that have some sort of explosive strap to it. That is a 1 to 5-kilometer conflict problem and solution. It's most likely not relevant for majority of the conflicts that are around the world that the U.S. is going to face. The kind of conflict that we're fighting in Ukraine is very different than what's going on in the Gulf. It's going to be in the Pacific. It's going to be in other parts of the world, potentially, hopefully not. So that's one.

Two, in that space that we're in, we're the leader, and we're on second or third-generation products. We're not only producing in volume. We've iterated and improved this technology multiple times. And we just, as you know, announced Switchblade 600 Block 2. It's a next generation more capable.

We are on Switchblade 300 Block 20. And we've also introduced our Switchblade 400, which is a whole new category for launched effects for it going into other platforms, tanks, armored vehicles, helicopters, airplanes. And then as you get larger, there's also room for larger loitering munitions on platforms such as the Predator, Reaper, manned airplanes, et cetera, et cetera. And so you see a huge portfolio. We have a phenomenal category solution provider portfolio, and we're even expanding that with our one-way attack solution such as Red Dragon.

And that's another piece of the market related to loitering munitions that is complementary. They're not actually competing with each other, very different missions for those two. So you're going to see more players. The market is growing. It's going to be a multibillion-dollar market. If it's not already today, it's on its way. And we've doubled our business last year. We've doubled our production. We're building another plant for $2 billion a year worth of production capacity for Switchblade or other products. That's going to come online later this calendar year, beginning of next fiscal year, next calendar year. And that gives us an additional capacity. And the reason why we're doing that is because we see tremendous growth opportunities here in the next 12 to 36 months.

Okay. Okay. Excellent. If we dig into the products a little bit and we think about from the Switchblade 300 going to 400 and 600. What are the improvements that have been made? How do they -- how does some of these improvements address the issue of jamming, for example, to give the product more capability?

Yes. So I think this is a very underestimated aspect of the competitive differentiators that we have in the market. Most of the entrants of new players in this market is like on their prototyping, early phase production level product. And if they've done that, they've never done it at the rigor of the U.S. DoD's safety, certification, operational requirements and logistical footprint and training and all that. We are way, way beyond that in that regard.

So there's a lot to be done for anybody who wants to compete in this market to make tens of thousands of it that goes into stockpiles with the U.S. military for a decade or so. That's a whole different ball game than making a quadcopter FPV in a garage and using it next week and 90% of it doesn't hit a target. That's not what the U.S. military is going to have in a stockpile. It's going to go in a stockpile. It's going to stay there for years.

And any time it's pulled out, it's got to work the same exact way it was working when you tested it before this thing, A. B, improvements. Switchblade 300 Block 20, for example, has a user field swappable warhead. You literally put your thumb inside the nose of the airplane, you pull it out, the warhead comes out, you put another warhead.

The other warhead that we've actually certified in that airplane in that loitering munition is called EFP. It's an explosive that an airplane that three of them weighs about 25 pounds that one person can carry. It could penetrate 90% of armored assets on the Ukrainian battlefield. Essentially, everything that the Russians make, except a main battle tank can be defeated with a little weapon system that goes this long and it's three of them carrying the [indiscernible]. That's a paradigm shift on what type of missions you can do with the Switchblade 300. And that's just one of 20-plus other improvements and enhancements in that product line.

Same thing with Switchblade 600 and same thing with Switchblade 400. And we don't have time to go into all the details, but I just gave you one little example on one iteration of the Switchblade 300 that is we're working on those levels of improvements and enhancements while others are trying to make the first one hit a tank effectively, let alone do all these other missions...

600 is a maritime capable. That's right. You put it on ships.

That's a big improvement. And you could go on a small boat, a boat that is actually moving with a lot of problems in the water. It could take out other assets that are moving on the water. And it's got a whole plethora of things. The gimbal improvements are significant. The anti-jamming software algorithm is significant. The type of radios you can put on it is modular, it could be done. There's a whole list of stuff. It's essentially a next-generation product. It's like a next-generation car. It's a significant improvement to the old model.

To what extent do you find among customers that cost can be a decisive factor in how they buy? And is there kind of a distinction you think in the U.S., maybe there's a little bit more of a capability focus. We wanted to do X, Y and Z, whereas when you take products of fraud to sell, the competitive environment is tougher because cost becomes more of a factor.

Yes. So this is very different than a consumer product like a laptop or an iPhone or iPad. There's a lot of talk about low cost, right? First of all, an FPV that I described that cost $3,000 to $5,000 that's used for the mission that I described is a very small portion of the target TAM or market. We intentionally decided not to play there because we knew that, a, it won't be a bigger mission set; and two, it's not as relevant and it's hard to make a lot of money in.

The rest of it, we're the cost leader actually. We're the high-volume producer with the lowest cost, and we compete with all sorts of players in every market, whether it's Puma or Ravens or Switchblade or any of our products, we have not only domestic competitors, but in every international opportunity, we have half a dozen or a dozen of the domestic local competitors. So we can compete on cost very effectively, number one.

Number two, I would say, is that there's a different bar when you talk about the U.S. military and our closest allies. Those drones that are made in Ukraine that have all sorts of Chinese parts will never make it into our stockpiles. There's way too many problems with that just on the supply chain alone. The level of the safety that you have to have to get these things certified to the U.S. rigor is significant, high bar.

The ability for the performance of the product size, weight and power is enormous. Like one of the most difficult things about Switchblade 300, for example, was to make 3 of them fit in a rack stack with all the gear that can be launched and weighs less than 25 pounds and it carries all that mission, all the warhead, et cetera, et cetera. And so that's not an easy requirement when you include all the other things. The book of requirement becomes the stick.

And so the bar people think it's like, all right, I'm going to make a lower cost book, and I'm going to be able to compete with this handbook. That's not this market. This market is years of expertise in the areas, building us a moat, a technology stack, and we've been successfully doing it for 20-plus years. We've had competitors from all corners of the world. And we don't usually lose because of cost. We haven't really. And if you look at our win rate, it's really high in that regard, too.

Okay. So the opposite side of loitering munitions, you've got counter UAS. And so can you talk a little bit about the path to growth? You've got several products here, Titan, Freedome Eagle, which is an effector, LOCUST, which is a directed energy weapon, which you're discussing on Sunday evening on 60 minutes. Where do you have scale already in your counter UAS business? Where could you scale quickly if the demand emerged? And kind of where do you see -- there's clearly high demand for this. How do you see the growth emerging?

Sure. So I'm glad you brought this up because we've lived through it, and it's a very crisp and clear takeaway in my view. The Ukraine war was an inflection point for drones, and warfare with drones and one-way attack and Kamikaze drones such as Switchblade and Red Dragon, actually mostly Switchblade. The Iran conflict is, in my view, and the demand has gone up and the brand and the awareness and the need and the programs and requirements and all that.

The conflict in Iran is an inflection point for counter drones and counter one-way attack drones. We have always believed that this market is going to come in, and it's going to lag the market that I just described initially. And I just read a report last week that Iran has launched 1,400 one-way attack drones on UAE alone in one week. One week, I think two or three weeks ago, the head of the oil business within UAE said this is going to be a catastrophic event for the oil economy of the world.

And you've seen that in the news every day, et cetera, et cetera. So my point is that we're at that inflection point. We've always had a multilayered approach to defending against drones and counter drones and Kamikaze missiles. First, the easiest, fastest way to protect is RF jammers, detect and defeat. We have the world's best deployed, successful program record won full rate production Titan series of counter UAS systems. You're going to see a lot more of that and all sorts of applications. And the second thing is that just recently, the U.S. government approved the use of those kind of systems for civilian applications of protecting stadiums, music festivals, hospitals, critical infrastructure.

That is a massive market. It is not even -- nobody has even scratched the surface. And that is going to start opening up in the next 1 to 5 years. We've got the world's best solution. We're already producing them. We've doubled, tripled capacity. We're going to -- we're increasing the capacity of that product up to $0.5 billion next fiscal year. And it's going to be a significant growth driver.

And that's just Titan.

Just Titan series of products for RF jammas for all these applications. The second category -- the second layer of defense is directed energy. That is our LOCUST systems. That was in the 60-minute news this past Sunday. And why is that important? We -- I believe personally that the holy grail for counter drones and counter loitering munition and counter one-way attack is going to be a direct energy solution for military? Why? Because military adversaries have -- are more sophisticated and these drones and counter drones are not going to be jam a bull.

They're not going to have dependency on RF communication. When you don't have that, then you have to be able to detect these things and defeat them without having an RF signature. And that's where direct energy LOCUST comes into play. We've got, by far, the largest moat and competitive differentiators in that category than anybody else that I know of in the whole world. And we've got the sweet spot solution. There's a program record with the U.S. Army.

They're competing it, and we're competing on a program. And hopefully, they'll have a decision. And that -- it's the first ever program record in this category for the U.S. military ever to buy production level product and the conflict in the Iran is basically as poster child of. What are you going to do when thousands of these come to you? That thing takes the cost of kill per target from millions of dollars per missile to $3 to $5 per shot. That economic equation is going to absolutely eventually prevail. And that's the solution. The third layer is if those two first layers of defense fail, then you use a kinetic kill. And that's where the Freedome Eagle-1 comes into play, which is a little bit further behind in adoption.

We've got -- we've been down selected with the U.S. Army for program on record. It could be as large of a franchise as a javelin missile. It's a very economical system that is focused directly for Group 1 through 3, mostly on Group 3 and eventually even to hypersonic missiles in terms of its market. And so our approach has always been a layered approach. We've got the best solutions on the first two, and we're developing the best solution on the third, which is another 1.5 years or 2 away.

Right. And is the -- do you think purchases from nonmilitary customers on Titan will be coming soon?

Really hard to predict the exact timing. I do believe it's going to come, whether it's going to be in the next 3 quarters or next 1.5 years, I believe it's going to continue to pick up because there is a significant amount of awareness in this area. And I believe that -- I hope it doesn't take a catastrophic event for this to happen. But events such as the World Cup, the Olympics, large stadiums, there's already expertise within these organizations trying to develop solutions and capabilities to defend against these kinds of threats. And NFL doesn't want to be known for a football game that doesn't have protection against this or the Major League Baseball or whatever, I'm just using that to develop examples.

And what he referred to the law change allows state police to use the Titan systems, and we've already seen some demand picking up there from the state governments. State police.

And we've seen, I guess, it's been reported in the press some use of the LOCUST by Customs and Border Patrol or the Army on the southern border. We know that there were some issues there involving the airport in El Paso. But we assume that, that has to do with -- that was -- that doesn't -- that involves the system working the way it's supposed to. It's just there wasn't maybe as much knowledge as there should have been about the fact that it was going to be on.

Well, the system worked exactly how it's advertised and how it's supposed to work. A drone was in airspace that it was not supposed to be there. The commander had the decision authority, had to make the decision. It's their decision, not ours. We're not involved in that. We provided a system that said we're going to do X if you ask it to do X, and it did exactly X when it was asked to do X.

The bigger awareness is about the use of directed energy systems in the national airspace. That has been a big, big challenge because nobody has been able to crack this code. We're one of the first players that actually has a system that's now operationally deployable that could be useful for those use cases. And FAA actually just recently did a test against a manned airplane where they took our system and they used it against that to see if it is safe. And there's, first of all, hundreds of safety measures built into the system to begin with, literally over 100.

But beyond that, actually proved in the FAA test that you are not going to be able to harm a commercial private manned airplane with the system that we have and the use cases that we have. So I think it's going to open up a significant more -- this is a new territory, right? FAA and U.S. Border Patrol and U.S. Army, they all have to work together on deconflicting. And that's something that is happening as we speak, and that's not the decision that we make as our customers.

I guess maybe two questions about just the stuff that's going on in the world now. I mean, are there opportunities to sell counter UAS systems quickly to countries in the Gulf?

Absolutely, there is. So really, right now for counter UAS RF detect and defeat Titan is really not necessarily demand, it's capacity. We are making them as fast as we can. And like I said, we're going to probably do -- we've published some numbers, as you know. We're significant -- we've more than doubled the capacity this fiscal year, and we're taking it up to $0.5 billion worth of capacity production this fiscal year, which is 1.5 months away. And so I believe that we're going to -- that's going to be a very -- probably one of the top growth drivers of our portfolio. We have a lot of growth drivers, but that's one of the biggest ones in terms of next fiscal year. And it's also a very highly profitable and EBITDA favorable product line.

That's -- is that like -- that's a fixed price...

Commercial item.

Commercial item with commercial margin?

That's right. And that came from the BlueHalo portfolio. It actually is in our Segment 1 business in terms of where it exists within the portfolio and reporting, but it actually came from the BlueHalo portfolio. It is the one that is most mature that's transitioned into a commercial product. We're selling it as a commercial item. We have a price list. We are already selling it to a bunch of international customers. It's been publicly disclosed that it's very effective in Ukraine conflict, and the market for that is fairly large globally.

Okay. Other conversations or conversations about other products you may have been having recently, have things picked up with the Department of Defense here about not just counter UAS, but also whether it's loitering munitions or drones. And to the extent that we see a war time supplemental, is that something where you might expect to see some funding for AV products?

Absolutely. I'm spending a lot of time in D.C., including this week and next few weeks, because, a, our categories are in high visibility, high profile, high importance and urgent, and we've got the best solutions in the market. And then also our system -- we're one of the very few companies that can actually produce these by the thousands today. We're doing them today. We're the volume leader in terms of production capacity now, not two years from now, not 24 months from now. So there's a lot. And of course, the complex that you see is like poster child of the side type of system that you need from AV and that we make, and we've been pioneering these for a while

Okay. Okay. I wanted to ask you about SCAR. I started covering the stock relatively recently. And it seemed like something happened in November reading about SCAR and the feedback from the customer and then the stop work order in January and then subsequently, the cancellation last week. Can you talk a little bit about what happened between now and then? And how is there a potential path to continuing to work on this?

Sure. So I'm only able to comment on it based on what I'm allowed due to our contracts and sensitivity to our customers in respect for them. Ultimately, we are a firm, firm believer in this capability and also in this capability gap. It is of high, high importance and urgency to the Department of Defense war. It is a very high priority for the space force, and it's a gap that must be addressed.

We believe we have a very significant head start than anyone else. This program was completed. We were -- we won the program. There's been a lot of scope creep. And we want to make sure that the overall program is successful to meet our -- the mission of our military customers and our country. What we wanted to have is a structure where we can actually develop and deliver this product at a commercial item. That is now really, really attractive to the U.S. Department of War. And so we sat down to see if we can renegotiate this contract and come to an agreement and there was only two options. You can come to an agreement on the existing contract or you can cancel and basically restart the program out the way.

We believe in this capability so much that we're going to continue to develop the capability as a commercial item on our own investments because we do know that the market for this is significant. Every satellite that we have in geosynchronous satellites in space, including even nondefense satellites is going to need this capability. You've got a parabolic dish right now talking to a satellite one at a time. And it's limited in bandwidth, limited in capacity, it's vulnerable, et cetera, et cetera.

Our phased array BADGER system allows you to talk to multiple satellites, up to 20 at a time, and you could do it simultaneously with higher bandwidth and multiple bands, and you could do it such that you could point -- without pointing the dish, you just point it digitally with electronics. It's basically a satellite dish and a chip instead of a dish.

And the improvements in performance is massive. Eventually, all the satellites in the world that are geosynchronous and even neosynchronous satellites are going to take some of the systems like this. So that's why we believe in the fundamental problem and fundamental solution architecture. While we do this, the government may recompete, recompete that they've said that publicly. And we are going to absolutely compete for that. But we hope that we actually develop this ahead of all that and deliver a solution off the shelf and the customer could buy and the whole thing is solved faster. It was about 5% of our revenue last year. We're still going to have a strong growth this year. We're still expecting to have double-digit growth next year. It's going to be less than 5% of our revenue going forward. We wanted to get this all cleared, so the story is behind us and we move forward with all the other exciting growth stories that we have in our business.

And -- when you were saying that the growth next year, you meant for the company as a whole? Or are you talking about SCAR?

No, company as a whole. Like I said, we have so many shots on goal that are very large potential growth opportunities. SCAR is just 1 of 10 or so. And we wouldn't expect SCAR to grow that fast immediately anyway. And it wasn't a massive revenue contributor either.

Okay. Okay. So when you think about the write-down that you took in the quarter last week, the -- does your future success on whether the program is called SCAR or something else, but on delivering that capability, might there be further write-downs depending on how that goes?

We don't think so. I mean it really relates to the whole space business, not just the SCAR program. So we've had a lot of positive developments on long-haul laser communications. We've got a $500 million contract there. That business also includes what we call gun sites business. So that's replacing the point and tracking capability on existing armored vehicles is included in that business model.

So [ Panther ], the phased array hypersonic missile tracking system is in that portfolio. So there's a lot of things in that portfolio that we feel very good about. It's just -- when you just -- when an event happens, the auditors pull out their spreadsheets and start evaluating the cash flows, and it just so happens that it was a little bit of a shortfall. It wasn't really that significant. The total value of the asset was $3 billion and the write-down was $150 million or so.

Noncash.

Noncash, right?

Noncash entry into the balance sheet.

Yes. Okay. Okay. You mentioned optical communications technology. How should we think about the scale of that opportunity and kind of what happens next there? That seems to be a pretty critical technology as the Space Force thinks about building out the architecture that they want.

So again, we have so many exciting things. It's hard to talk about every one of these and give it enough merit of its own doing. Most companies have one or two maybe max, and we've got like a dozen of these things. Laser communication, so we talked about BADGER being this RF communication phased array that revolutionizes RF communication with satellites.

But even that needs to be complemented or supplemented with a laser system because RF systems are all jammed. And so you do not want to rely on one way of communicating to these billion-dollar satellites. The next-generation evolution is to actually have optical laser communication from the ground to these satellites. A, it's much, much more non-jammable; and two, it has got a much, much higher throughput of bandwidth. And we won a program of record basically with the U.S. military to develop and deliver and progress the program, which we have what we call the laser communication terminal.

We've got the technology that allows you to actually hit a satellite halfway to the moon from the ground. That technology is 250,000 kilometers out. And so it is the holy grail, again, long term for satellite communication to the ground. And we are -- and the secret sauce that is in our BADGER system and our LOCUST system is and our laser gun site is very similar to what Kevin had described here, which is the ability to track and hit the target at long, long distances.

And that's something that's not easy to do. Everybody is focused on more power. It's like giving somebody more bullets, but they don't know how to hit the target. It doesn't help solve the problem if you can't aim. The most important thing is solve the aiming problem, then I can give you more bullets to kill more targets or hit more targets. And so our ability to hit a small -- give you an analogy how precise and how accurate this is a laser pointer that we have in here, for example, imagine pointing this to a strand of human hair about a football field away from you with your human hand.

Yes. So you got to have the precision to be able to put that laser on a strand of human hair at a distance of about one football field. We've got to hit a satellite dish at 70,000, 80,000, 100 kilometers out in the space from the ground while the satellite is moving and the earth facilitating. That's the technology that makes it so unique. And I do believe that in the next five years, a significant more funding and acquisitions will happen in this area specifically.

Okay. Yes. Excellent. .

And we're to lead in the space, by the way.

Yes. And I know it's a place where people have been trying for a while to make progress. The piece -- when I think about the BlueHalo merger and the company that came in, I thought of it as like a kind of stable piece and a growth piece. And we just talked about kind of the growth pieces is space and directed energy. The more stable piece was kind of cyber and Mission Systems. That business seems like it's headed for maybe $350 million-ish of sales this year, ballpark. But we have seen some pressure. Can that cyber and mission business maintain that level of sales going forward? Is that kind of how people can think about it? Is there further pressure on it? Can it return to growth? What's sort of the profile there.

Yes. So by far, the biggest value driver as part of the acquisition of BlueHalo was all these pieces that I described that are long term. The strategy has always been to bring these very complementary set of solution sets to make a portfolio that really solves our customers' missions better. Cyber, we've always said it's not going to be the fastest growing. It is also the one that got hit with the [ dodge ] activities at the beginning of the fiscal year, the administration.

We have a baseline. Yes, $350 million is very doable, number one. Number two, we expect that actually to grow going forward. It's just that the growth is not as explosive as the other categories. We've always said that. We maintain that. We're doing -- it's absolutely a high mission-critical set of cybersecurity operations that we do that's both offensive and defensive that is really unique and desperately needed in our military and our intelligence community. So we believe that this is important, but it's not high growth. It's going to grow, but very slow, single digits.

Okay. Okay. We're getting close to the end. So maybe if we can sneak in one more. Just when we think about the expectation and the cash flow expectation for the year, we've seen some working capital growth year-to-date. What gives you confidence of being able to liquidate that here in the fourth quarter?

Well, this year, we had a lot of growth in our Switchblade or loitering munitions business. So a significant growth. And at the same time -- and that's probably the main driver of the working capital growth during the year is that business. We also, during this year, had some product transitions and new products, specifically, as Wahid was mentioned earlier, the Switchblade 600 and 300 went to new generations. And that just caused a little bit of a log jam in our unbilled receivables. And that all seems to be behind us now. I think we'll see some good progress in the fourth quarter, but not all the way there, but then in the successive quarters start to see that unbilled coming down for that business.

Right. Okay. Okay. Excellent. And with that, we're out of time. So yes, this was very informative, and we appreciate both of you being here. Thanks very much.

Thank you so much. .

Thank you

Good day, everyone, and welcome to AeroVironment Third Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I would now like to turn the call over to the Head of Investor Relations, Denise Pacioni. Please proceed.

Thank you, and good afternoon, ladies and gentlemen. Welcome to AV's Third Quarter Fiscal Year 2026 Earnings Call. My name is Denise Pacioni, Head of Investor Relations for AV.

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 Investors 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, March 10, 2026. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Joining me today from AV 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?

Thank you, Denise. Welcome, everyone, to our third quarter fiscal year 2026 earnings conference call. I will 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. After this, Kevin, Denise and I will take your questions.

This past quarter's results came in below expectations, primarily driven by revenue timing and adjustments made in our space business. Given industry-wide delays in government funding, along with the shutdown, several orders we anticipated to receive in the third quarter have shifted to the right by a quarter or 2. Recognizing we fell short on expectations this quarter, we are now more than ever focused on leveraging our unique operational and execution capabilities and driving long-term value creation.

We have a track record of delivering strong results and our core strengths in product innovation, deep customer relationships and manufacturing scalability will enable us to capture increased demand in this high-growth market. Strong order flow increased our funded backlog in the third quarter, which is positioning us for record fourth quarter revenue and a solid start to our fiscal year 2027.

Before providing details on our progress to achieve our growth targets, let me cover key highlights from the third quarter. First, we achieved strong orders and grew our funded backlog to $1.1 billion with year-to-date total awards of $4.6 billion. Second, we announced several key program awards and bookings in high-growth markets where AV holds a competitive advantage over our peers. Third, we're transitioning certain programs to commercial product solutions that are aligned with customer expectations, leading to improved long-term profitability and broader market adoption. And fourth, looking ahead, we're adjusting our revenue guidance range to between $1.85 billion and $1.95 billion and adjusted EBITDA to between $265 million and $285 million and remain on track for record fourth quarter revenue.

You're going to hear a lot about what we have underway and what's behind our strong forecast. Let me start by outlining exactly what drives our confidence in our fourth quarter and fiscal year 2027. The demand for cost-efficient AI-enabled autonomous nonlethal and lethal drones and counter drones are unprecedented. NAV is well positioned to capitalize on this generational opportunity that is in front of us. Our products and solutions are helping shape the newly defined battlefield with the full suite of lower offerings, long-range one-way attack drones, advanced radio frequency-based counter UAS solutions, 1 through 3 uncrewed aircraft systems, and space, cyber and directed energy platforms and technologies to support our U.S. defense and international allies.

Producing in high volume and continuously scaling production ahead of demand are key differentiators that allow us to stay ahead of our customers' needs. During this past quarter, we progressed the build-out of our new manufacturing facility in Salt Lake City, Utah, and we expect it to be operational about a year from now. This 140,000 square foot facility has the potential to produce more than $2 billion worth of Switchblade or other AV products annually.

In addition to expanding our manufacturing footprint, we continue to evaluate the strength of our supply chain by identifying long lead items and ensuring all suppliers can scale along with increased demand. Taken together, these actions reflect our company's strategy and focus that have guided our business for more than a decade. Investing capital into the business, developing commercial products, building out capacity slightly ahead of demand and most importantly, ensuring we are delivering best-in-class solutions that meet our customers' mission objectives.

We remain in active discussions with the U.S. space force regarding the Badger phased array antenna system to support the scar or satellite communication augmentation resource program. We appreciate that the contract was temporarily paused while we worked together on a firm fixed price contract that provides a commercialized product solution. As of this morning, we could not come to a mutually acceptable agreement with our customer to modify the existing contract and resume work. Therefore, the U.S. space force has concluded to terminate our existing contract for convenience. Pay us for our allowable incurred costs with a fee and enable AV to recompete for the program with their revised requirements and our proposed solution.

I must emphasize that we remain fully committed to delivering this innovative capability to the market while aligning to our customers' needs and transitioning our phased array solution to a commercial offering and business model. The need for this capability, gap has become more important and more urgent than before, and we believe we have an innovative and compelling solution that is unmatched in the industry.

By developing our solutions as a commercial product and recompeting for this program's revised requirement, it will enable AV to build a more flexible and profitable business in the long term while meeting our customers' critical needs. This is a recipe and strategy that AV has successfully demonstrated and achieved multiple times in our history.

Additionally, we're actively working to transition several of our other new and disruptive capabilities towards commercial products across our space and directed energy segment. These include our locust directed energy counter UAS solution, our laser communications terminal for space command and control and our laser communication gun sites. By transitioning these offerings to commercial products, we can quickly scale manufacturing to meet accelerated delivery schedules, improve margins and broaden our customer base while also satisfying our customers' desire for a firm fixed price and commercialize off-the-shelf solutions.

Again, this is a recipe that AV has demonstrated successfully several times in its history over the last 2 decades. This is precisely our strategy with BlueHalo solutions. We are confident that this is a new approach and a win for our customers and a win for AV.

I would like to now walk you through Q3 achievements within each of our segments as well as near- and long-term growth and profitability initiatives that will help us reach our strategic growth objectives. Our Autonomous Systems segment continues to drive revenue growth for the company, making up 68% of our overall revenue for the third quarter. Even though the government shutdown in early November caused a delay in funding and shifted the timing of certain orders, revenue for the segment still experienced significant growth compared to the same quarter last year. We expect additional delayed orders from the third quarter to be booked in the fourth quarter of this year and first quarter of fiscal year 2027.

Several commercially developed and mass reduced products in our Autonomous Systems segment are key growth drivers for the company, including our Group 2 Puma AE and P550-UAS systems, our Group 2 JUMP 20 and JUMP 20X systems, all variants of Switchblade, our Red Dragon family of one-way attack drones, and our counter UAS solutions, including the Titan family of AI-enabled RF jammers and Freedome Eagle-1 or FE-1. These are all key strategic products that AV has developed, successfully transitioned into commercial solutions and scaled production to meet increased customer demand.

During the third quarter, we were awarded an additional 5-year sole source IDIQ contract worth $874 million from the U.S. Army for our UAS and counter UAS product lines to support foreign military sales or FMS demand. This contract enables our allies to procure a range of AV Group 1 through 3 unmanned aerial systems and counter UAS systems, including vapor, JUMP 20, P550, Puma, Raven and Tiner Counter-UAS. In addition to this large award, we received a $168 million task order from the U.S. Army for Switchblade 300 Block 20 and Switchblade 600 Block 2 loading munition systems. This additional delivery order represents the U.S. Army's first procurement of AV's next-generation Switchblade product line and was issued under the U.S. Army's existing 5-year IDIQ contract for little unmanned systems in August of 2024 with a total ceiling value of $990 million.

Looking ahead, we anticipate continued strong demand for our Switchblade family of products from both domestic and international customers. Domestically, we are working now to increase capacity at our new Salt Lake City facility in preparation for an increase in demand, including from the low altitude stocking and strike ordinance or Lasso, program for our new Switchblade variant, the Switchblade 400.

Internationally, we're engaged with several allied nations, including Taiwan, Japan and South Korea on Autonomous Systems, namely the Switchblade 600 to support their national security needs.

Turning to our counter UAS capabilities. The use case for AI-enabled RF detect and defeat counter U.S. continues to rapidly expand both domestically and abroad. In fact, just last week, we were awarded a $23 million contract from the U.S. Marine Corps for additional deliveries of our Titan SV. With demand on the rise for our Titan family of products, we are actively increasing manufacturing by more than 4x this year, with additional plans to increase by more than 10x current levels by fiscal year 2030.

Titan is the leading AI-enabled counter UAS solution for RF detecting the feed at home and globally. Our Titan family of Counter U.S. solutions, which was part of the BlueHalo portfolio, as one of AV's strongest revenue growth drivers in the coming quarters and will contribute greatly towards future margin expansion as well. We're also making progress on our FE-1 program with the U.S. Army, which, as you may recall, was awarded a $96 million contract last fall for the U.S. Army's long-range kinetic interceptor program. We are progressing on the development contract and moving toward flight testing in late fiscal year 2027 or early fiscal year 2028.

We're seeing continued strong growth with our UAS products contributing the most revenue for the segment this past quarter. We're also seeing increased interest in our newest one-way attack lethal USA drone, Red Dragon. Red Dragon is an easily deployed lethal drone that offers modular mission integration and is complementary with our Switchblade family of products. Red Dragon is anticipated to be a key growth driver in this segment for future quarters, and we're rapidly scaling the production of this product line to meet anticipated customer demand.

Just as we created the Lloyd in munition category with our Switchblade products, the Red Dragon is positioned to define the next category in autonomous one-way attack drones. An example of how we will disrupt the market once again with the creation of another category.

Our Group 2 solution, Puma AE continues to see strong domestic and international growth, operating in 45 countries and remaining the dominant ISR platform, both domestically and internationally. Just this past quarter, we expanded our Puma visual navigation kit to our Puma LE variant. This additional capability uses advanced computer vision and onboard processing to deliver precise global navigation satellite systems or GNSS, an independent navigation and degraded or communication denied environments. This is an industry-leading critical software upgrade that ensures our war fighters have successful missions in contested environments.

Interest in our P550 continued -- during the quarter, AV was awarded a $13 million contract to provide P550 UAS for the U.S. Army's long-range reconnaissance program or LRR. This key initial win opens the door for additional orders that will help drive growth in fiscal year 2027, and is another platform we're currently scaling its production to much higher volumes.

Besides growing demand for our Group 2 products, we're also seeing strong international and domestic growth for our JUMP 20 and JUMP 20X, which is the best-in-class Group 3 solution offering on the market. As we stated in our last earnings call, JUMP 20 was recently added to the U.S. Navy's basic offering agreement, allowing us to compete for all applicable future U.S. Navy task orders. In addition to this, we have won 5 additional programs of records in Europe this past year alone.

Let me remind you JUMP 20x can operate in extreme maritime environments with long range, long endurance, multimission capabilities for our domestic and international maritime customers. JUMP 20 unique ability to land on smaller-sized moving ships provides a distinct advantage over its larger Group 4 competitors and is offered at a more competitive price point.

We have already seen significantly increased demand and we're increasing the production capacity of this product line this fiscal year, and we plan to increase it again by 3x in fiscal year 2027.

Turning now to our space, cyber and Directed Energy segment. Revenues in this segment accounted for nearly 1/3 of AV's total third quarter revenue. Coming off a record second quarter for bookings, our space, Cyber and Directed Energy segment continues to make progress on several key programs across the portfolio. Within our space and directed energy operating group, we delivered 2 of our Joint Light Tactical Vehicle, or JLTV mounted locus laser weapon systems to the U.S. Army.

Locust is a cutting-edge cost-effective solution to counter Group 1 through 3 drones. Our Locus laser weapon system is performing well in the field in multiple theaters and we're preparing to commercialize locus to broaden our market base and while increasing production. As locus moves into a higher volume production to meet the U.S. Army's needs, it will be a significant revenue driver for the company in the coming years.

Additionally, we have proposed our local system to the Department of War as part of the nation's Golden Dome Safeguard solution. It is currently being evaluated as part of the Golden Dome architecture, and we look forward to providing additional updates on this important initiative.

Our Cyber & Mission Systems operating group continues to make strides to recover from the impact of the government shutdown last quarter and was awarded a $75 million task order extending a contract to advance biotechnology and smart materials for the U.S. Air Force. We look forward to enhancing our capabilities in laser communications, space-related satellite communications and directed energy.

Building on the achievements across our segments and profitability initiatives, we're also continuing to prudently reinvest capital into our software solutions, including AV Halo. We do this because we believe in the future of our business and our ability to turn these investments into value creation. This open architecture software platform is designed to unify command and control intelligence analysis, synthetic training and autonomous targeting across all domains to create advanced communication among critical assets during conflict.

We are continuing to deploy critical counter UAS solutions through our collaboration with Grand Sky to establish the foundation for a Golden Dome for America Limited area defense architecture at Grand Fork, Air Force Base and North Dakota. The Golden Dome for America initiative provides an opportunity for AV to focus how our software hardware and services all support their inner layer of the Golden Dome. Based on engagements with our customers, we estimate that this opportunity could represent approximately $0.5 billion to AV over the next 3 years, and we expect that we will create a model which can be replicated across other critical U.S. national security sites. We're also successfully integrating BlueHalo and are realizing meaningful synergies from the acquisition.

Before turning the call over to Kevin, let me summarize with key following comments. While results were below expectations, we are extremely confident in the top line growth on several of our key programs and product lines in the fourth quarter and beyond, and are on track for a record fourth quarter and record fiscal year. We're focused on scaling manufacturing to meet rising demand on several of our product lines and high-growth markets.

We recognize the one center generation opportunity we're part of, and we will continue to drive results. The current conflict in Iran is a reminder that our country and our international allies rely on our defense, aerospace and space capabilities. AV's innovative portfolio is very well positioned to meet this demand and support our country and our allies critical defense needs.

We're confident that we are well positioned to deliver high priority multi-domain solutions due to our scalable manufacturing, differentiated technology and innovation and strong customer alignment, which enables us to meet our customers' evolving needs.

Before I turn the call over to discuss our Q3 financial results in more detail, on behalf of our Board and leadership team, I want to thank Kevin for his contributions to the company since 2020. Over this period, AV's market cap increased from approximately $1 billion to over $10 billion today. As we previously announced, Kevin will retire at the end of July and will stay on to support our new CFO with a smooth transition in the coming months. We wish him all the best in his retirement.

Kevin?

Thank you, Wahid. Today, I'll be reviewing the highlights of our third quarter performance during which I will occasionally refer to both our press release and an earnings presentation available on our website. I will briefly comment on our results for the quarter and then turn the guidance for the remainder of FY '26.

While the third quarter did not meet our expectations on several fronts, and we are lowering our expectations for the year slightly -- we continue to be well positioned for continued high growth as many of our products move from the test and evaluation phase to full adoption by the U.S. military at allies. The best example of this is our Locus Counter-UAS directed energy product which we expect to be a significant growth driver in the coming years. And has proven to be the leader in this extremely important category for national defense. In addition, our mature product categories like UAS and Switchblade provide significant growth, resulting in AV organic growth of 38% year-over-year in the third quarter.

At $1.6 billion of revenue in the last 12 months, AV is one of the largest, most profitable defense technology companies. We are the leader in defense technology with a diversified portfolio of proven and emerging products. The well-publicized stop work order for the SCA program did have a negative impact on the quarter and is in part the reason we are lowering our full year guidance. This resulted in a non-cash $151 million goodwill impairment as the evaluation of the acquired asset, the space business was triggered by the work order. The reevaluation resulted in a reduction in the acquisition value of the acquired space business of approximately 17%.

We do not expect any further adjustments to the impairment as a result of the notification of the customer to terminate the contract for convenience. It is important to note that even with the program changes, we are still confident in our growth trajectory as a result of the diversified business model and the strength we're seeing in other product areas.

Now turning to the quarterly results. We ended the quarter with $1.1 billion of funded backlog and approximately $3 billion of unfunded backlog. I should note that approximately $1.5 billion of the unfunded backlog relates to the program, for which we were under contract at the end of the quarter. We expect an adjustment to the unfunded backlog as a result of the intent of the customer to terminate for convenience and the resolution of the customers' obligations under the current contract.

As Wahid mentioned in his remarks, revenue totaled $408 million in the third quarter, which represented a 143% increase over the prior year as reported or a 6% increase on a pro forma basis. As mentioned previously, legacy AV organic growth was 38% in the third quarter. Slide 6 and 7 of the earnings presentation shows the third quarter and year-to-date revenue by operating group for each of the 2 segments compared to pro forma FY '25 revenue.

The AXX segment recognized $279 million in revenue in the quarter, which represented a 25% increase over FY '25 pro forma revenues. In crude Aircraft Systems composed of Groups 1, 2 and 3 UAS led revenue growth for the segment with more than a 50% increase compared to the pro forma FY '25 third quarter results. unconsistent without you train revenues grew 54% year-over-year driven by Puma, JUMP 20 and the Tomahawk family of systems.

Precision Strike and counter U.S. products improved more than 21% for the pro forma results for the same quarter last year. Switchblade 600, Switchblade 300 and time sales continue to be very strong in the third quarter.

The Space Cyber and Directed Energy segment recognized $129 million of revenue in the third quarter, a pro forma 19% decline year-over-year following the stop work order on the space car program and the U.S. government funding delays. The space and directed energy products declined 14% in the quarter versus the prior year pro forma, driven by the scar stop work order, while locus Directed Energy Canada UE continued growth. Cyber Mission Systems that showed a 22% decline in pro forma revenue largely result of programs that were discontinued and also negatively impacted by funding delays which associated with the U.S. government shutdown.

Moving to gross margins. Slide 13 shows the adjusted product and service gross margin, including reconciliations to GAAP gross margin. Third quarter overall gross margin -- adjusted gross margins were 27%, which was flat to the second quarter of FY '26, but lower than the 40% third quarter -- the third quarter FY '25 adjusted gross margin. As noted, the business landscape of the combined new company has changed significantly with higher service mix and several products in the early stage of maturation.

The third quarter did present some additional challenges to adjusted gross margins. Specifically, third quarter margins were also affected by a last-minute shipping and supply chain issues resulting in a $40 million of high-margin revenue pushed to Q4. We However, we believe adjusted gross margins should improve to the low to mid-30s in Q4. We are now projecting a full year outlook for adjusted gross margins in the high 20s, low 30s, which is consistent with our original guidance for the year.

Moving to operating expenses. As mentioned earlier, the SCAR stop work order represents a trigger event requiring a goodwill impairment test resulting in the $151 million noncash impairment charge. Adjusted SG&A, which is net of the intangible amortization and deal integration costs was $61 million versus $33 million in the prior year. The increase is largely a result of the combination with BlueHalo. But as a percentage of our revenue, adjusted SG&A in the quarter was 15% of revenue versus 20% in FY '25. And again, the adjusted SG&A levels represent a shift in the business model as we expect to end the year in the 13% to 14% range as we begin to realize synergies and achieve higher revenue levels.

Year-to-date, we have largely achieved our expected year 1 synergies. R&D expense in the third quarter was $27 million or 7% of revenue compared to $22 million or 13% of revenue in the prior year. Again, the 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 range, 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 Q3 was $44 million up from last year's Q3 of $22 million as reported, primarily due to the incremental BlueHalo results and the legacy AV revenue growth -- organic revenue growth.

Adjusted EBITDA as a percentage of revenue was 11% in the quarter, a sequential improvement from the 10% of adjusted EBITDA margin in the second quarter. We continue to forecast full year adjusted EBITDA margin between 14% and 15% of revenue.

Now turning to non-GAAP earnings per share. Slide 12 shows you the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.64 for the third quarter of fiscal 2026, more than double of the $0.30 per diluted share for the third quarter of fiscal 2025.

Moving to the balance sheet. At the close of the quarter, our total cash investments amounted to $649 million, a $20 million sequential decline versus Q2 of FY '26, primarily driven by an increase in our inventory to support Q4 revenue. Also, our unbilled receivables continue to be at a higher level than we are targeting. However, we had significant collection activity at the end of the quarter -- into the fourth quarter, and we expect that to continue throughout the fourth quarter.

Turning to -- now to backlog. As noted earlier, our funded backlog at the end of the third quarter was $1.1 billion, and unfunded backlog was $3 billion, which includes the $1.5 billion car-related portion of which was discussed earlier. Our visibility to the midpoint of revised guys range is 98%.

Finally, I'd like to provide you our updated FY '26 guidance. On Slide 8 of the presentation, we provide a revised fiscal 2026 guidance. Fiscal year revenue is now expected between $1.85 billion and $1.95 billion, adjusted EBITDA between $265 million and $285 million and non-GAAP adjusted EPS is now projected between $2.75 and $3.10. The midpoint of our revenue guidance raise represents 12% growth over the pro forma FY '25 results.

Although the revised guidance raise reflects lower expectations for the year, our confidence in the Blue Halo acquisition remains higher than ever. This combination is a force to be reckoned with within the defense technology sector and the full potential of the combination will be realized over the coming quarters as some of the BlueHalo acquired products start moving into a more terminal cadence.

This is likely my last quarter as CFO. I want to thank Wahid and the AV Board for the opportunity and belief in me. I am very proud of the success of AB so far and my contributions to that success. I also value my relationships established with hundreds of investors and the many analysts who have invested in AV and follow AV.

As mentioned earlier, the potential of AV as a leader in the defense technology sector and its impact on National Defense are virtually limitless.

Now I'd like to turn things back to Wahid.

Thanks, Kevin. Before turning the call over for questions, I would like to reiterate the positive momentum we have entering the fourth quarter of fiscal year 2026. First, despite challenging headwinds in the quarter, we achieved third quarter revenues of $408 million, up 38% organically year-over-year.

Second, our funded backlog grew to $1.1 billion and we have recorded $4.6 billion worth of total year-to-date awards, which is another record for the company. These results have positioned us to achieve another record fourth quarter financial results. And third, overall demand and business momentum remains strong across many of our product lines, as evidenced by our robust and growing funded backlog supporting our strong growth well beyond fiscal year 2026.

We remain focused on execution. This includes transitioning more commercial products and business model approach in the BlueHalo portfolio, while scaling manufacturing to meet growing customer demand and improving profitability. The long-term prospects for growth and value creation for the company have never been better. I would like to thank our employees, shareholders and customers for their continued commitment to AV and our mission.

And with that, Kevin, Denise and I will now take your questions.

[Operator Instructions] it comes from the line of Madrid with BTIG.

And Kevin, thank you so much for everything. It's been a pleasure to work with you and select with everything ahead.

Thank you.

I want to I wanted to start by maybe just talking about the long-term prospects of SADE now with the absence of SCAR. I mean how should we be thinking about growth at the business moving forward? And not even just growth, but you could break it down a little bit further, I mean, to the margins, I understand SCAR was a pretty big driver of what you guys were expecting to do in EBITDA this year for that segment? What else could be kind of carrying the weight here on out, not just in '26 but beyond?

Thanks, Andre, for the question. So -- the situation with the Space Force and the SCAR program is evolving daily. I was in Albern New Mexico yesterday, met with the key decision-makers and the program leaders of the SCAR-BADGER program that's base force. And we -- as you know, we started negotiations with the customer so we can resume the work. Unfortunately, we could not come to a mutually acceptable solution that allows us to have a win-win outcome moving forward by renegotiating and resuming the work. So the customer has to choose to terminate for convenience and we're entitled to our allowable legal costs incurred plus a profit fee. We are more bullish than ever before that the Phased Array BADGER system and the technology that we have is best-in-class and needed badly for the needs of our country and for the constellation of geosynchronous satellites to U.S. military house.

The urgency and the priority on that capability gap and the need for our solution is actually stronger and more urgent now than ever before. Space Force has directly told me that they're actually going to invest more money in this area because we need it at the country.

Lastly, we're not going to stop our efforts because we are a firm believer in developing this solution as a commercial item and basically applying our recipe that we've done for years. We're going to continue to develop the capability. We believe we have at least a 3 to 3.5-year head start on all competitors. If space force is successful to recompete, great, we will be eligible to recompete and participate. And our ultimate goal is to basically able to sell the solution to them as a commercial item. We believe that's much more favorable for the customer and for AV financially and operational. So we do not expect the SCAR program to have a significant impact on our growth profile beyond this year. We're still going to have a growth year this year. We're going to have a record fourth quarter, record fiscal year performance, both on top line and profitability. And we're positioned for strong growth next year and beyond. There are several other products and technologies within our space and directed energy business that is in high, high demand and a transition to commercialization today. That includes our local system, our directed gun site and our laser communication terminals, all of which are expected to grow rapidly over the next 2 to 3 years.

So we're very bullish in this segment. We're very confident about this acquisition in this segment, in this business in general. We are more than ever before, committed to accelerating our progress. This is something that we've done several times in our history, and we have prevailed and we've demonstrated that business success outcome both for ourselves and value for our customers.

Got it. Got it. Really appreciate the color there, Wahid. Maybe on a if we could pivot to the Autonomous Systems business. You look there, I mean, on the $990 million IDIQ that you guys have, you've got a recent delivery order of $16 million over less than 2 years, you're already up to over $700 million in terms of -- on that vehicle. Have you been having discussions with the customer as to when that could potentially be upside? Is that something that's in the cards? Or is that something that comes up in conversations often?

Andre, the short answer is yes. We're actively talking to the customer. And as I mentioned in my remarks. The customer just placed another contract, and awarded as a contract for over $800 million for our family of products, including Switchblade family products, primarily for FMS sales. But it does not -- it gives them a lot of flexibility. So we have 2 large contract awards and platforms that the customer can buy under a; b, the customer does have the ability to increase the ceiling on these contracts and the customer also has the potential option to extend the time frame of these contracts. We've had that several times in our past. And I believe, to your point, we are reaching a point where they could consume more products than the ceiling allows today, and we're actively working those different options with the customer. And that's the reason why we feel so bullish to increase our production capacity and going beyond this fiscal year into even next fiscal year 2028 and build another factory that could produce another $2 billion of our products. So we feel very strong about that momentum.

Our next question comes from the line of Louie DiPalma with William Blair.

Kevin, congratulations. It was great working with you. Definitely. For my first question, how much revenue does AV expect to recognize from SCAR for fiscal 2026 when taking into account the termination fees and the other fees associated with the -- ending the contract?

We don't get the specific forecast for each product, but it's included in our guidance. We've factored that all in. And so we feel comfortable, even though this was late breaking news, we're very comfortable with the guidance for the year.

Yes. I was wondering from the perspective of investors are going to be wondering how they should be modeling fiscal 2027 if this contract ended. And so is there a ballpark in terms of is it like 5% of total revenue? Or is it less than 5%? Or how should we be thinking about that for fiscal [ '26 ]?

It will be less than 5%. It's not a significant amount next year. That was factored into all of our modeling for the goodwill impairment that all stays intact. But I'd say it's less than $100 million.

Great. And Wahid and Kevin, you recently announced the $186 million Army order for the directed requirement involving the Switchblade 600 and the Switchblade 300. 4 of your competitors have made contract announcements recently for the Army program and the Marine core organic precision fires light. How has AV progressed with both of those programs? And what's the timing in terms of when you expect your awards and the timing for a potential production award, I think, for last so you are using your Switchblade 400. So yes, what's the sense of timing for those programs?

So Louis, we are very actively engaged with the U.S. Army on several fronts on the Swiss blade family products. First of all, you're absolutely right. we were just awarded a $186 million contract for production delivery, not prototypes, not early testing and evaluation, but production units of our second-generation Switchblade 600 Block 2 and then also our Block 20 Switchblade 300. These are the initial two orders for the next generation of Switchblade -- 300 Switchblade 600 products.

In regards to the LASSO program, if you recall, a year plus ago, we were awarded multiple tranches of task orders by the U.S. Army for the direct degree who was referred to as directed requirements, which was essentially part of the LASSO program. So we were the only company who received those awards about a year to 2 years ago. And most of the other players didn't get anything at that time. So it's actually a catch-up for the other players to stay in the game and receive some awards as part of the competition in order to put the competition for the last low to be valid and fair.

So B, I must also say that our Switchblade 400 is purposely designed for the LASSO program. We've designed this from the ground up to be a very well-suited product for that capability. It is quite likely for both LASSO and OPS, Marine Corps, that there is more than one solution for the mission that they require to be part of the final selection of the portfolio of solutions they're going to have. And we feel very good about our options. We had a program review with the Army this past week in our offices for a couple of days. We're doing really well. We're executing. We're performing. Our product is performing really well. We're delivering products to them, and we continue to actually see increased demand from them. They are asking us to produce more because they're going to buy more from us. That's the signal that we're getting from the U.S. Army. Exactly what this means for those competitors, I can't comment on that. that needs to be directed towards them. But what I can tell you is that we're positioned quite well on these programs. We're focused on these. We believe we have the right solutions. We have been executing we've been delivering, and we believe that we're going to be a serious recipient of some orders in this in the long run.

Great. And one final one, do you see the Iran or accelerating the time line for your Freedom Eagle-1?

Absolutely, yes, Louie. We have seen an unprecedented amount of requests and demand for proposals and quantity and ROMs, rough order of magnitude quotes from both domestic U.S. customers as well as international customers, not just for the Freedom Eagle-1, but also for our suite of our product line. The conflict in Iran is another example of how well we're positioned on the type of solutions that we've got that means the desperate need of our customers, the U.S. military and our allies. I just read a press release or a report this week that Iran has launched close to 1,400 one-way attack drones into UAE alone in one week. The need for locust the need for our RF jammers, the Titan series, the need for our one-way attack drones such as Red Dragon or the need for Freedom Eagle-1 and the need for our JUMP 20 and P550 is starting to look better and better, and I expect all this to convert to some additional demand in fiscal year '27 and beyond. So I do believe that this is a good critical moment to showcase our capabilities. And also, we're the only ones or one of the very few that can actually produce in volume and deliver a battle-tested proven technology or capability to warfighters today.

Most players are talking about production capacity 2 to 3 years from now. And manufacturing sites they're going to build that's going to produce whatever number later. We're doing that today across several of our product lines.

One moment for our next question, please, it comes from the line of Jan Engelbrecht with Baird.

Congrats on retirement, Kevin. I think -- yes, sure. And an update on the up on the direct energy portfolio, just some of the key programs and many milestones we should look out for the rest of calendar year '26 and then '27, just some recent developments. There was a laser weapons test in Albert this past weekend. You got an RFI from the Air Force for a new laser weapon system on Friday -- last Friday? And then just any updates on your specific programs on FPIC, AMP or JLTV integration? Just how should we think about that? Because it does seem like we're getting closer to an important sort of time for laser weapons, especially if you just look at what's going on in Iran?

So Jan, thank you for the comments on the question. And it is really important for our investors and our audience to recognize that the situation that we saw 3 to 4 years ago in Ukraine, where it was a showcase of our loading munitions, one-way attack, reconnaissance drone led to a significant shift in the market in terms of demand for those capabilities and higher rate production and more orders and more growth for us. I believe we're in an inflection point with both our RF counter UAS systems as well as our direct energy local systems. I was in avocado facility where we manufacture these systems, and our customers would love to have a lot more of them. In fact, most of our customers are behind the 8 ball as an analogy, if I may use that in terms of having systems in their hands.

So we are building systems currently not only for that particular conflict today, but I believe that is going to transition into additional long-term demand in these categories which we are clearly not only the leader, but we're the only game in town that actually has a solution that works, and it's been performing in the field today. It is actively involved and engaged in theaters, multiple theaters and the customer is extremely satisfied with its performance. And we have an unprecedented opportunity and position in the market, which we are really trying to scale production and go forward.

Exactly how much that demand it is -- means for next year, I can't quantify right now. It is going to be strong demand, and we expect that to eventually turn into a similar situation as it was in Ukraine, even if the conflict stops tomorrow because Locus was developed specifically for Group 1, 2 and 3 drone defensive solution. It is the only direct energy solution that I know of in this size and range that achieves the mission outcomes for our customers successfully, and we're delighted about being able to help our customers.

Perfect. Very helpful. And a quick follow-up, if I may. In the event, it's very uncertain in the meter is sort of drawn out or prolonged in the coming weeks. Are there any systems? I mean, I imagine you're very well positioned, but any systems you want to call out that could be fielded sort of on an accelerated basis by the DOW or sort of be part of this $50 billion emergency reconciliation munitions package that we heard about last week. Is there anything sort of a few programs or platforms you can call out where you could see that happening?

Yes. Jan, in particular, I will highlight a very strong imminent demand for accelerated adoption of our one-way long-range attack drones such as Red Dragon and its family. Our directed energy systems called LOCUST, and our Titan series of RF detect and defied solutions as well as our reconnaissance drones such as JUMP 20 and P550. Those 5 products, specifically, I expect us to have a increased demand going into fiscal '27 and then hopefully beyond.

One moment for our next question, please. It comes from the line of Ken Herbert with RBC.

Congratulations, Kevin. Maybe just to talk about the revised guide for adjusted EBITDA. How much of that -- and apologies if I missed it, but how much of that is SCAR? And anything else that's moved to the right on the adjusted EBITDA and how we think about then bridging from fiscal '26 to '27 on the adjusted EBITDA in terms of the margin potential upside?

Well, I mean, some of it is obviously related to SCAR, some of it, which is basically a reduction in the revenue. So most of the EBITDA revised guidance is a result of the revenue -- lower revenue guidance and somewhat more R&D during the year. But in terms of expenses are right on track, obviously, a little -- we're higher than we would have probably done if we know the revenue was a little lower, but the business model is definitely intact. I think that as we look at the commercialization is what he was talking about of LOCUST and some of the other things in the space and directed energy segment that we expect to achieve higher gross margins next year than this year, which will drive accelerated -- continued EBITDA growth probably greater than revenue next year.

Okay. And maybe just an update on the Switchblade now that you officially have the 400 in the product family, how do we think about capacity on that program? And it sounds like that franchise obviously continues to continues to be very well viewed by the customer set. What's maybe the mix of 300, 400, 600, where is capacity? And how do you see that scaling in the next 6 to 12 months?

You welcome, Ken. So I continue to see a lot of potential and growth in revenue for our Switchblade 300 Block 20 and Switchblade 600 Block 2, which is -- we just did our initial shipments to the U.S. Army. I think the demand for those 2 products Irrespective of the Lasso program of record or the U.S. Marine Corps OPF program record is going to be very robust, both domestically and internationally. We do not intend to reduce those or slow those down. I think we're going to continue to see demand for that, and it's going to continue to grow.

Switchblade 400 is purposely developed for the future longer term growth and adoption of this family. It's primarily developed for the 2 key things. One is to be able to capture the LASSO program of record. And two, it's designed in such a way that it could be actually mounted in a variety of different platforms much easier. So future helicopters, future airplanes, future ground vehicles, are all -- future drones, larger drones are all potential recipients of the Switchblade 400 variants in the long run. But that's going to be about a year plus later based on the program adoption cycles that we see.

And the reason why we're increasing our production even further with the Salt Lake City facility is because I believe that beyond fiscal year '27, we're going to continue to see demand in these categories in these products, and the mix will shift eventually more towards 400 but not any time soon.

Our next question comes from the line of Seth Seifman with JPMorgan.

This is Rocco for Seth. Thanks for all the help, Kevin. It's been great working with you. Was the SCAR contract split between the cyber and mission systems and space and directed energy subsegments in SD&A? And if not, what kind of weight on Cyber Emission Systems revenue in the quarter?

So that revenue is actually part of that entire segment. And the car program is under the space not the directed energy piece. I'm sorry, the space and direct energy, not the cyber piece. So the cyber security and cyber and mission systems, that business is separate, and it's not affected by the SCAR program. It's primarily the other side of the segment to our business, which is the space and Direct Energy.

Right.

I mean, even though it's down year-over-year in that segment, most of that was planned because of some programs that had gone away before we even acquired BlueHalo. But obviously, we're just doing a pro forma versus the prior year. And there's parts of that business is doing very well on orders, but it's not necessarily showing up in revenue right now.

Right. That makes sense. And I guess if we're looking at CD&E moving on in Q4 without SCAR, should we be thinking about the segments being able to see growth in Q4 versus the pro forma numbers? And what are the main growth drivers we should think about in the segment?

So long term, I'll let Kevin answer the first part of the question. But long term, we expect our space and cyber business to actually be a significant growth and revenue drivers for the next few years. There are several products, as I mentioned, in technologies that we're at the cusp of transitioning into a commercial item and scaling its production. We did the first one, which was our RF Titan series from Blue halo, but that's in Segment 1. However, the products that are in segment 2, which is essentially the local systems, the laser communication terminals and the direct -- also the gun site, the gunsight, the laser and gunsight system, these are just transitioning to production. And they should be significant growth drivers in fiscal year '27 and beyond. So we expect that segment to grow aggressively over the next several years, that's part of the portfolio.

Yes. And we do expect Q4 to be strong. I mean obviously, the actual space business is going to take a hit with the SCAR program. But the other businesses like directed energy, we expect to have a very strong fourth quarter.

Our next question comes from the line of Jonathan Siegmann with Stifel.

Just on SCAR, I know we've been talking a lot about it. Can you just talk a little bit about what success looks like in the recompete? Is it splitting share with somebody else? Is it selling more units at less of a price? Is it having a different role in the contract? And then also an idea of when we might hear something on how you guys make out in that recompete?

Sure. So Jon, we intentionally work with our customers to find a win-win solution on the current contract, the way it's structured. We couldn't do that. Success will look like as follows. We want to develop this product on AV's R&D dollars as a commercial item. Because we believe the market opportunity for this is massive, and the billions of dollars globally besides just this space force. We also know that the need for this capability gap has not gone away, and it's stronger. And if we had a commercial off-the-shelf solution available today, I'm a firm believer that the space force and many of the customers would be procuring them as a commercial product with more favorable pricing and more favorable profit profile because typically, we take more risk on R&D upfront and then we sell the product at a higher margin once it becomes commercialized. That is precisely our strategy.

While we're doing that, Space Force is going to try to recompete this and see if there's other better product or more than one product that can meet their needs. Because the need for this is actually increasing, not decreasing. And they have indicated to me directly that funding for this actually is going to increase, not decrease over the next 3 to 4 years. So our intent is as we develop our commercial product, to then provide a commercial solution to the U.S. space force and be able to sell it to them when they are procuring it. And that's the decision that we made jointly with the space force that I believe is a win-win for both parties. It achieves their objective, and it achieves our objective, what we want to do long term.

Obviously, we're not happy that we're taking a hit on the short term, but it is a very good option for us long term, and we're committed to it. My personal commitment and confidence in this solution set is stronger than before. And I believe if we had a commercial offering today, we would be selling it now. It does not exist, and we want to go faster, not slower.

We've already had inquiries from other customers for the product. So as well...

That's right.

But is it conceivable you could be selling this revised product as early as maybe fiscal '27? Or is this more of a longer-term development effort?

So most likely, we're redoing that based on the requirements. One of the challenges is to get our customers to agree to a set of requirements that we lock in lock down. And most likely it will be more of a contributor in fiscal year '28 than '27, in terms of significant revenue contribution to the overall portfolio. there are other items in the space business that's going to contribute revenue, but most likely not the BADGER systems in the next fiscal year.

One moment for our next question that comes from the line of Ronald Epstein with Bank of America.

This is Samantha Stiroh on for Ron today. We're just wondering, are there other programs under OTAs that could be at risk and the programs you highlighted as in transition? Are these programs of record? Or are they still under OTA as well?

So Vanessa, this is the only program that I know of today. Obviously, we have a large portfolio of programs that are very long, small and medium sizes and large. But this is the only one that I know of right now that is in this situation, -- and it's not just because it's OTAs. It's primarily because of the circumstances of the customer and their need to go to a commercial model and the capability gap and the desire that we would like to transition there, too. The other products or technologies that we have, we're already transitioning anyway, and there's not a program record for those today. we're competing for some, but we expect those to be successful in the models that we want. So this would be the only one to my knowledge today of this size and magnitude that we're talking about.

Got it. And then when you talked about the mix shift pushing margins down for the combined BlueHalo AVAV. Do we see that turn more positive? Or do we expect it to be structurally lower for the near future?

We think as we become more commercial items in the space BE business that will drive both the adjusted gross margins, but more importantly, the adjusted EBITDA margins higher over time. Before the merger, we had about adjusted 18% EBITDA margins. BlueHalo much of their business was more like a traditional defense contractor, but the opportunity is significant to take a lot of the things that they were working on with different customers and make them more commercially available. LOCUST is just one of them, that the Gunsite product is -- we're very optimistic on that. It's getting a lot of traction. Also the WAS product, which is kind of a derivative of BADGER for existing ground stations is also showing some traction. So we're very optimistic as we take these things to commercial markets, it will be significant growth and improve them, the gross margins and the EBITDA margins.

Our next question comes from the line of Trevor Walsh with Citizens.

Wahid, maybe just a clarification. For the programs that you called out within Space and Direct Energy, specifically the locus, the laser comms and the laser gun sites. As you take those to more of a commercialized approach. Can you just -- I'm assuming -- that doesn't mean that you're necessarily retooling those from a technology perspective to make them more cost similar to what's happening with BADGER? Or is it just more the go-to-market and just that more of just as you kind of move them to just a different phase of their cycle, if you will?

It's more, Trevor, a go-to-market business model and strategy than the programs. The reason why the BADGER was both is because we already had a contract that was a cost-plus contract, and terms and conditions of that contract basically constricted us from being able to go to a commercial model. So we had an opportunity to renegotiate that with the space force. And now we're moving more expeditiously towards that model. But most of it's -- no, there's not really any change in the technology. We have very compelling differentiated solutions and technology. We're trying to change the business model and the go-to-market strategy with our customers in the market on how we price these, how we offer this and how we actually want to build the business going forward and scale it.

Got it. Super helpful. And Kevin, maybe just one quick follow-up for you. Just piggybacking on around the guide and just maybe a more directed question. So -- if I just look at the midpoint from where you had the FY '26 guide to where you guided now, it's about a $75 million shift down. Is it fair to assume that, let's call it, a strong majority of that sum is SCAR related or maybe even more even split of SCAR and the other programs that you alluded to? Just trying to get a sense of kind of what the full range of that impact was?

Well, I mean, this has been a tough year in many ways. I mean, you've had all the government funding delays and the pushing of things to the right, some of the things that usually drive our margins higher. To be honest, we've been somewhat capacity constrained on the things that really, we could have probably shipped this year that we now are in the process of building capacity for. So when you put that all together, at the end of the day, we hit the midpoint of both the guidance is. Obviously, we're hopeful that we'll be well into the over 1.9 range on the revenue as our original guidance set, it just drives that EBITDA margin down because of the volume and the mix, but it's really the volume that drives down the number. But we're very optimistic about next year, seeing the activity that's coming in. The money is starting to flow. It seems like to the different forces, different branches and then down to the programs, then the war that activity is significant and likely to drive our growth higher than this year for next year.

Our next question comes from the line of Austin Bohlig with Needham & Company.

First one just has to do with your guys' updated full year revenue guidance. If you're just looking at the autonomous segment, obviously, demand trend seems to be strengthening. How has that changed compared to the beginning of the year when you gave this guidance when you kind of back out the scar opportunity?

So Austin, we don't go into that level of detail for the future forecasts. We will provide our forecast that later. What I can tell you is that the demand on our systems are quite strong. So -- we had three primary -- that led to a quote that we're not satisfied with. I'm not happy with, and I'm holding my accountable more than anyone else for that. We are committed to actually deliver on our fourth quarter. We've had a long history and track record of being successful and growing and delivering value to our shareholders. We had a miss because of 2 external issues and 1 internal issue, as I described in my remarks, the demand of fundamental underlying demand for our systems never been stronger in my tenure at AV for 16 years. And both in our Autonomous Systems segment as well as in the space and cyber business, we've got strong long-term growth opportunities here. We're committed to those. We're going to have a great still year growth year, as Kevin mentioned earlier in his remarks, and we're going to be positioned really well for fiscal '27. And so we are committed to performing and delivering value and results to our shareholders. And in Q4, we're going to see strong growth. But unfortunately, there's not a lot of time because of the timing delays, we can't convert all that to revenue that quickly. There's only so much that our customers can take and how fast we can put through the factories and get them sold off to our customer satisfaction and keep the quality where we would like to be at 100%, great quality. So it's going to go into Q1 and beyond. And I think it's going to be a growth year again next year for us.

There's nothing wrong with this year. I mean $1.9 billion of revenue, putting these 2 companies together and facing all those challenges and still be able to accomplish that with all of the government funding turmoil and things like this, a SCAR. I'm very proud of that hitting that target. And the EBITDA will be within, say, 90% of what our original guidance was. So there's not -- nothing to be ashamed about this. It's still the leading biggest defense technology company out there in terms of EBITDA, in terms of revenue, any metric you want to have. So I think it's overall and all, it was a great first year of this merger.

Okay. And then kind of my second question has to do with LRR. That line item in the budget got a significant increase, which includes SR, MR and LRR. Do you guys have a sense of kind of like what the allocation might be for you guys in or related to LRR in total?

So Austin, we have not received any specific sort of breakdown of how the funding is going to be allocated to those categories. Well, what I do know and what we are certain about is that our customer is in desperate need to acquire more of these solutions as quickly as possible. We've had our manufacturing ready review with the customer for P550. They just gave us an initial order, which I described on my earnings remarks comments. And I expect the P550 and LRR to be a significant growth driver in fiscal year '27. And for that specific reason, we're actually ramping up production even more. And so I think we're going to be most likely receiving based on my understanding and reading the market and the customer interest healthy significant growth in our P550 product line in terms of revenue next fiscal year in orders.

Our next question comes from the line of Nicolas Labadie with UBS.

Zooming out of it, as UAS bordering munitions, one-way attack drones and many of your other technologies continue to evolve daily on the modern battlefield. How do you balance meeting the current demand surges that you're seeing from the customer with the risk of building excess inventory given the pace of advancements in the space and how quickly some technologies are becoming obsolete?

So thank you for asking that question because it's an important one. We really watch that very carefully to make sure that we do not have built inventory excessively that then could become obsolete or not useful for our customers. The situation is such that the customers today and most likely in the foreseeable future, will take all the demand that we can build on the categories that we are talking about. The U.S. load munition, one-way attack, RF counter UAS, et cetera, et cetera, in direct energy. So we're scaling these things based on really, really solid anticipated demand that we see in fiscal '27 and fiscal '28, number one.

Number two, the second point I want to make is that the system, the products are designed such way that we can make upgrades and improvements to them on a modular fashion quite quickly. And so the situation in the battlefield could change. And when it does change, we make adjustments, we make improvements, and we've rolled those out on the existing platforms and even on our existing systems and the architecture. So it is not a very large change in risk in that regard.

Lastly, throughout the last 3 to 4 years, we've learned a lot from the Ukraine conflict. We're there involved with a dozen of our different products and thousands. And so there is not a lot that the adversary can throw at us that can surprise us. And we're staying ahead of that. We've been staying ahead of that, and I think that's a recipe that we know how to execute on quite well compared to everyone else. And so I feel pretty good about that. At the same time, our customers are really, really asking us ramping up. There is not only a shortage in terms of what they can use today. There's a shortage in terms of stockpiling and filling their magazines for the future because the world is not a safe place. And this is -- looks like it's going to continue for a while, and we're positioned quite well.

Our next question comes from the line of Clarke Jefferies with Piper Sandler.

Kevin, maybe to put the funding turmoil in the rearview mirror. I mean we're now here with the new budget. There were reports last week that there might be an appetite to pull forward some of the reconciliations funding. Is it too early for you to see some of that contract activity or some of the new sort of process start to proceed with the budget underway? And maybe just maybe paint us a picture of the next 6 to 9 months on how some of this spending authority plays out? Do you expect the peak of the sort of contract activity to happen between now and September? Or how do you expect it to play out? And then one follow-up.

So Clarke, I do expect an uptick in contracting and awards for us in the Q1 and Q2 time frame, primarily because of the budgets. I'm in Washington, Capitol Hill and Pentagon regularly. We have a team very focused on tracking the funding and the approval of this money, while it's authorized and appropriate, it still has to come in from the OMB to the Pentagon and to specific accounts within the services in order for the program officers to be able to execute on those contracts. They are priming the pump. They are working with us. We're tracking it very closely. I see really positive signs I can't predict it exactly to the right quantity, but I think that the momentum is moving in the right direction. And I think you're right that in Q1 and Q2, we should see an uptick, primarily because the next budget cycle starts out after that, and the government budgeting cycle ends towards the Q2 -- or Q2 roughly.

Perfect. And just a follow-up, I think you touched on a lot of coverage of the BADGER program and the commercialization in other of the CGE program. But I just wanted to specifically ask what commercialization might look like for the BADGER program? How does that change your current manufacturing lines or the capacity plans you may have, does the commercialization look like a retool of that technology to bring the capability more in line of what the off-the-shelf offering would look like. I just love a little margin detail on commercialization for BADGER going forward.

Sure. So let me add some color there, Clarke. We understand the capability gap. We understand that our C2, the command and control systems for all of our military and intelligent satellite needs to be upgraded in overhauled. Phased array is going to be one of the key solutions in that problem statement. And we have about a 3-, 3.5-year head start than anyone else. We also understand what it takes to actually have a solution that works. In fact, we've demonstrated some of that already. So as long as we can neck down the requirements with the customer to a definitive crisp level, we're going to go ahead and lock down the design and we're going to convert that into a product that we can produce and deliver to our customers. That will take about a year or so time frame. .

And at the end of that, we will have a product just like a Switchblade or just like a Puma or just like a JUMP 20 with a whole bunch of different features and functions and a price tag and a lead time that our customers can procure. We do not have to engage in black word. They have to actually watch over us on how we develop the solution and how much progress we make every day on that design effort. It is all going to be within our control. We want that because it allows us to go fast. It allows us to design the best solution for our customer. So success would look like that in the next 12 to 18 months. And I believe that the need continues to actually grow rather than shrink. And the urgency in our customer is increasing, not decreasing. It is a very high priority for the U.S. space force to solve this problem and address the problem with the solution. And we are well ahead of everyone else. We just need to get it done and deliver the solution as a commercial item.

Next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

I wanted to follow up on your commentary on the conflict in Iran, and particularly the Switchblade portfolio, given that the industry has evolved since the start of the Russian-Ukraine war and there have been some new entrants into the UAS market. How might the possibility of boots on the ground in Iran, be similar or different versus several years ago? And then what do you view as the biggest differentiators of the Switchblade family from other competitive offerings?

Well, so -- we have several competitive differentiators than anyone else, right? We're already battle proven. We're already relevant. We've already validated that it works against those kinds of threats. The type of drones you see such as Chad and others that Iran is firing, we have faced those already in the battlefields of Ukraine. And we're also the one that could produce them to day reliably, at that scale.

Lastly, as the enemy lines move, our systems are going to be more relevant because of the ranges that you have to reach and hit, and the offensive side. On the defensive side, we've got the best solutions in the market that is actually working today, right? Both in the RF detect and defeat jammers, the Titan. I mean, literally, we can't make those fast enough. We are ramping production as fast as humanly possible, while keeping the quality high.

I want to emphasize we want to make sure that our product is always of highest quality when it gets to our customers' hands. That is how we built our reputation, and we're not going to compromise on that. And lastly, I want to mention the locus direct energy. The number of drones and 1 we attack drones that Iran is firing at us and our allies in the region is quite, quite overwhelming, right? And we need solutions such as LOCUST to be able to fight this economically and protect us. Our ships, our bases, civilian sites, critical infrastructure, oil refineries, power plants, the grid, all of these things need to be protected, and they are all phenomenal candidates for our solutions. So I expect that demand to increase probably more than even the supply that we have. But I think we're going to get a very good share of this demand if there were boots in the ground or if there was no goods in the ground.

Our next question comes from the line of Austin Moeller with Canaccord Genuity.

We'll miss you here, Kevin. So I guess just to start off, on Badger, so I mean the system was designed to be modular and built out of tile. So -- how difficult will it be, I guess, to reformulate it into a more commercial solution with the smaller form factor since that's what the space force has indicated they wanted. And I guess, -- you said, I think, on the last question that you think it will take 12 months to produce a product?

Yes. So Austin, about 80% to 90% of what we've already developed and designed is going to be applicable to the modifications that we want to make. The modifications are essentially to do two things: To simplify the solutions in its manufacturing processes, a; and b, to make it more cost effective. So we can actually achieve the overall program objectives for the customer, which is a right? And so those two things mean that almost 80% plus of what we've done in the tile architecture of the Phased Array of the BADGER is reusable, if not more, if not more. What we're trying to do is to reduce the parts count simplify the design, shrink it to a smaller size, reduces complexity, make it more of a viable commercial product while utilizing 90% or so plus of the existing development and architecture and design that we've already done. It's not really -- we don't have to invent new technologies or new designs to achieve that. Really, those risk factors have already been burned out. Now is the time to execute on transitioning to production and lower cost and reliability, so we can scale.

And thank you, ladies and gentlemen. This concludes the Q&A session. I will pass it back to Denise Pacioni for closing comments.

Thank you once again for joining today's conference call and for your interest in AV. As a reminder, an archived version of this call, SEC filings and relevant news can be found under the Investors 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.

This concludes our conference. Thank you for participating, and you may now disconnect.

We'll go ahead and kick it off. I know standing between us or this -- you guys in happy hour is probably not a good thing to keep.

Thanks for the spot.

No, it's a good spot though because everyone is going to be a good mood. Thanks all for joining us today. I hope you've had a good first day of the Citizens Technology Conference. I'm excited to kind of move this maybe to -- from the digital to more of the physical realm with the Executive Vice President and Chief Financial Officer for AeroVironment, Kevin McDonnell.

I'm Trevor Walsh, the Senior Equity Research Analyst for Aerospace and Defense, and we're going to run through a good little fireside chat here, and then we'll kick it over to you all for questions from the audience. So thanks, Kevin, for being here. Really appreciate it.

Well, I appreciate it, Trevor. Thank you and thanks to Citizens.

Let's just maybe with the more -- the most recent news from last week, your retirement from the company. Congratulations first, but maybe just give us a sense of how you're thinking about or the company is thinking about when they think replacement, obviously, you've been there for a while. What is the kind of next person taking the reins of CFO kind of experiences, qualities in that leader? Do you think that will heat...

Well, I mean, it's definitely got to be somebody who is experienced in growth. I mean we feel like this is only the beginning, like there's really strong growth prospects for the next 5 years. And going from a couple of billion to $5 billion is a challenge. It's -- I feel pretty proud of where we got it so far. And the next person has got to be able to build -- take it from that $2 billion to $5 billion in a very dynamic defense market where things are changing and has to be adaptable to the situations and being able to take -- I just look at the capabilities of the company and they are immense.

I don't even think we've even really begun to fully tap into everything that we have, but that will come. And so this person has to be adept at understanding that, identifying that, shaping a culture that's innovate -- continues to be innovative, but at a scale -- at scale.

Perfect. You took my kind of next question about kind of first order priorities, but maybe anything that you expect to kind of remain consistent or unchanged kind of that you either already implemented, et cetera, that they can just expect it to sort of run with, I guess?

Well, it's still a work in progress. I mean with this -- the combination of BlueHalo, we went from under $1 billion company to a $2 billion company. And the types of infrastructure and processes you need at $2 billion versus $1 billion are actually pretty different. So I think there's still work to do there. I'm not going to sit here and say everything is hunky dory, just basic stuff, how you prepare for a conference call when now you have 15 business units versus 3, these types of things are things we're all still trying to work on improving.

And then we just throw some new systems in the mix for this year. That's the one thing that I think that is going to be a positive for my successor is we've done -- we've made a lot of progress on the system front. We're on platforms that are world-class platforms of Workday, Oracle Fusion and the government cloud, Salesforce and I think ServiceNow soon. So we have a world-class infrastructure, which is great. But I think the big part of that is that we're going to be able to take advantage of some of the AI tools and things that all those vendors now offer to automate things, better analysis and things. So I would say that's the one thing I'm most proud of is that I was there to start the effort to lay that foundation for it to be a big company.

Perfect. Yes, I got to hear Mr. McDermott' speech from ServiceNow earlier. So it sounds like you picked a good kind of solid partner there for sure. Exciting. Great. I'll switch gears a little bit, if I can. You mentioned BlueHalo. Can you -- there's obviously a lot to talk about there and whether it's capabilities, kind of how the company and the models change, which you've alluded to.

But could you maybe just walk us through the history of -- from a margin perspective, specifically, kind of where -- just remind us kind of where you saw -- well, where you saw a legacy AV before kind of acquisition merger and then kind of bringing in the BlueHalo piece, what that sort of -- how that changed margins? And then what should we kind of expect or kind of look for from that standpoint kind of on the go forward.

Yes. I mean today, the Defense Department talks about companies having a commercial model where they would invest in products and bring them to the government, and they would select them and not do these massive RDT&E projects to get, that's been -- the commercial products has been the AV model for a long time. I think we embedded that model for defense somewhat. And so we had a great EBITDA margins, 18% always double-digit growth. And BlueHalo, I would characterize as more of a traditional defense contractor in much of their business. The pieces that were more commercial like Titan, or their underwater vehicle, these types of things were commercial.

And those end up being in the AXS segment. But the space segment, the cyber intel, our Mission Solutions business in Dayton are all more traditional time and material type businesses. So those come with a traditional defense contractor type of margins. I'll have to say that the BlueHalo team is extraordinary at government contracting and subcontracting, which is important even in a commercial model.

So the real value creation here comes as we move some of their core products like the ground station known as BADGER today to a commercial model, the LOCUST laser counter-UAS system to a commercial model, a product called Wasp, which is a derivative of BADGER for existing -- upgrading existing ground stations and a product called [ Gun Sight ], which is appointing and tracking technology on traditional ground-based weapon systems or vehicle-based weapon systems.

All those are ripe for commercialization and taking more to product margins. And I feel like, as I stand here today, it's about going to be a 1- to 2-year -- I mean you'll see obviously pieces of it, but a 1- to 2-year process to get those more commercialized global markets and increase the EBITDA margins. I mean, fundamentally, it's not a good business model to have 1 customer who's telling you what to do and you're beholden to them because if they don't -- they fall in a favor or they don't get funding, then you're stuck there.

So a commercial model is a much better model to say we have this technology, here's the specifications and sell it to multiple customers than try to have 1 or 2 customers. And the U.S. government probably has to look at that and say, we have to be better at allowing those companies to sell their technology globally because again, that helps scale and helps improve the capital for these companies to even do better and sell more products to the U.S. government. So I think that's a part of the model that needs to work from the U.S. government standpoint.

Got it. And so over that kind of 1- to 2-year time frame, then do you see kind of company margins returning to that legacy kind of where it was 18%, is that sort of a reasonable like target.

Yes. I think so. That's what I think.

Okay. Great. Another great...

We're right on the cusp of these products becoming -- moving from basically the experimental. We're trying to see if this works phase to the full adoption phase. And by that nature itself, will help your margins, but even more accelerate those margins if you get them to a commercial model.

Perfect. Since we were kind of on that topic or at least touched on it, we'll -- why don't we talk -- move to SCAR and to BADGER. Obviously, some news came out today. So I just want to give you a chance to just generally -- not that it was necessarily new news per se, but any initial thoughts just broadly on kind of where that -- what's happening around BADGER and maybe all -- just setting the record straight.

Yes. I mean from my perspective, we had the satellite ground station, the phased array ground station that was going to capture multiple signals at a time for multiple satellites out there and communicate back and forth. And just over time, the spec got such that when we quoted it one, 2 new systems back in the fall, the price tag was a lot higher than the government expected. And so they asked us to look at ways we could reduce the cost which we did, and we came up with a version that's less expensive because basically, they looked at it and go, "we don't have enough money" -- it's a pretty simple thing. "we didn't have enough money to get all the ground stations that we need with our mission set." And so they said, "Can you make something less expensive, maybe not as exquisite and do as much capability." And we said, yes, here's an idea, and we gave them that idea.

We tested it and we proved that, that works and -- on a test situation. And that's when we said, well, that's the version they want to go to because we can get the units we need to cover the mission set. At the same time, they want to go to a more commercial model, which we're totally fine with and have a fixed price and a set delivery schedule and all the things that comes with that. And that's the process we're in now of negotiating that go-forward contract. We didn't cancel the contract. We're still on the program. We still have a contract.

They've indicated, I think there was a news article today that maybe they'll have some other people take a bid at it. But I would say we're multiple years ahead of any particular competitors in the market. So that's -- it's a little bit of a game of them trying to make us go faster, I think.

Do you think they've already felt like they've gotten sort of the win or they've gotten what they needed from you from a price point perspective. So it's now more just like...

Well, we're negotiating that. So we're still going.

Still going, okay.

Well, if it's a good negotiation, they're unhappy and we're unhappy.

Sure. On that note of competition and you being ahead, do you think that you're ahead in -- with respect to BADGER and SCAR specifically technologically or capacity and manufacturing, both of those things?

Both of those things. I mean, one of the competitors is a start-up that's getting a lot of news. They're a software model, recurring subscription model. But from what I've been told they don't have the hardware yet, and they haven't been able to prove upward communication. So those are big hurdles to overcome. But nonetheless, I think that this -- the new product will have wider, more ubiquitous use cases. So I think that it could become more of a commercial product. And so -- because if it is too exquisite and too overpriced, then the commercial market shrinks.

So for us, we look at it as a long-term good thing to have a product that is more useful to many customers versus one.

Great. Can we maybe -- let's dig in there maybe a little bit more because I think you've talked about it in the past and recently with us. As far as more commercial kind of nondefense or non-space non-primary customer type customers, international, et cetera. What -- can you just give us a sense, maybe not actual specific customers, but just a flavor of what those customers might look like and what the use cases might be for them?

I could just say generically, anybody who's communicating with multiple satellites would want the capability of -- it isn't going to be called BADGER so we call it something else for that new product over time, whether they're defense or nondefense.

Got it. And so that could be anyone from someone just operating a constellation of communication satellites, it could be optical and more imagery. It could be any of those things really.

Right.

Okay. Got it. Great. Any changes to give -- I mean does the facility that you have in New Mexico to kind of to turn the BADGERs out. Does that need to have any kind of major overhaul or changes to it given the new specs on thing? Or is that essentially kind of business as usual?

No, we see that as a positive that we don't really have to make any major capital investments, potentially some more R&D investments given the nature of the contract. But at this point, we don't believe that, that certificate. But we're very proud if those have been in our Albuquerque facility, very proud of the facility, the testing bed we have, the state-of-the-art equipment and the capabilities we have there. So like I said, that all gives us kind of -- I mean the government needs these systems. They want them as fast as they can. So somebody that can provide them sooner is going to be -- have a tremendous advantage over a newer company.

Got it. Great. I'll switch gears a little bit. Can we talk about Red Dragon?

Love to.

Okay, cool. What do you think is just the art of the possible in terms of pricing and quantity for -- again, not specifics, but just a hypothetical customer that would want to have Red Dragon. What does that look like from just kind of a deal perspective?

Well, I mean, how these technologies go. In the beginning, it's all very mission-focused. They want this capability for this mission, this type of stuff. We're kind of in -- and we need to try it here and there, that type of thing. We're kind of in -- we're still in that phase a little bit. But as I look forward, I just kind of put it this way, make it simple for myself, that if I was a country, I was Korea -- South Korea. And I wanted to buy 500,000 of something, that's what they've said. I'd buy hundreds of thousands of Red Dragons and tens of thousands of Switchblades because you have the on-mass swarming type capability, fairly low cost, but could do some massive damage as a group of, say, 50 or 100 shot at a target.

So we're very bullish on the future of Red Dragon. And the real -- the one way attack at a lot of publicity with the Iran invasion, we're familiar with that one-way attack drone. Our view is it's not as capable at hitting the target as the Red Dragon would be.

Got it. And I think, correct me if I'm wrong, but the Red Dragon price point as of now that you're thinking is actually less than, I think, all the Switchblade models.

Right, correct, correct. It was -- I remember in the beginning 2 or 3 years ago, this is how long things take. Two or 3 years ago, there was this notion like Taiwan, they need something that's low cost, easy to assemble that people can make in their garage and they could make hundreds of them and shoot them on. That was kind of the notion and then eventually this idea of Red Dragons, something that's easy to assemble, easy to store. It has a zipper pouch for the kinetic effect, so you don't have to store it with the kinetic effects was born out of that idea. And here we are, 3 more plus years later at least, but we feel like we're right on the cusp of full-scale adoption.

Great. Maybe just -- so great. Thank you for level-setting around like kind of an initial purchase of what that might like for, you know, for a country. How much -- and I think we've seen this a little bit with LMS and Switchblade where there's almost like a recurring type of spend because they either get used or even training or otherwise, these are not necessarily meant to be an exquisite system that just comes back, right? They're like munitions -- they're effectively munitions. How does that look for Red Dragon. Does this have a similar type of feel where they're not just customer doesn't just buy the 100,000, but there's kind of more orders kind of as they come because they're just going to get depleted over time.

Yes. Any time you have a weapon like this, you're going to have a recurring business because they're going to be firing them off for training. There's probably a notion that these things improve over time that maybe you just want to deplete 20% a year or something like that for that reason. But in Switchblade type products, Red Dragon, we're just so early on this. These countries have not got to a point where they're going to buy thousands yet, but that will happen in the next 2 or 3 years. So we're early days.

Okay. Now that was one of my last questions is so should we think FY '27 as a possible contributor do you think or beyond for...

Red Dragon?

For Red Dragon.

Absolutely. Absolutely.

Okay. And then final question to then on Red Dragon then we can switch to a new topic. Do you -- and you mentioned what's kind of happening in Iran now as real time around these one-way attack type munitions. Do you think in terms of just broadly that as a category, what factors do you think customers are evaluating kind of most between the cost autonomy capabilities, manufacturing at a scale that can get it done, something else? Like how do you think they're balancing all those things as far as making a decision around a final hit the target.

Hit the target. I mean, they got to work. They got to hit the target, they got to find the target. This is where we have strong capabilities, completing the mission getting the mission done, cost is -- everybody always says they want -- I mean, I haven't met somebody buying a product, didn't want it cheaper. I mean -- but -- so the cost is always element. This was designed to be a high-value weapon system. But everything has its day. There's a myriad of weapons that U.S. have that have different ranges, different payloads, different use cases. There's no end-all-be-all. There'll be many different products in the kind of the lethal drone category. We think between this and Switchblade, we've covered a nice part of the market.

Great. Perfect. Okay. Well, let's go from the stuff that goes boom to maybe the stuff that prevents the boom from happening and talk a little bit about counter-UAS if we can. When we had you out for investor meetings a few weeks back, you talked about 2 different counter-UAS site implementations by FY '27. Can you maybe just give us a sense of like what that -- I mean, are those essentially -- the type of installation that that's most likely going to be ...

Well, as we said, we're pitching -- we're pitching kind of part of the Golden Dome initiative, which is a protected critical infrastructure that we actually have the capabilities that you need to protect critical sites. So it's just like any type of sales process. We're trying to make that pitch. We have our LOCUST laser weapon systems. We have our RF defeat systems. We've got the software, we've got the tech systems and the Titan SV product. We can put that together on a site. So the goal is in the next 12 months or so to get the government to agree to have us put on a couple of sites.

I think no matter what, laser counter-UAS, we're definitely the most important player. You would think that an analyst would pick up on that is more important than a little contract issue with SCAR, that we basically -- I mean, look at all the -- just a little publicity we've gotten lately in the border, not that it's massive, but I mean that's -- people don't understand, that's like amazing.

The U.S. government is using counter-UAS lasers on U.S. soil that are made by us. They wouldn't use it -- they wouldn't use it if they didn't really fully believe this is capable. So we believe this has big opportunity in the short run for us. This is -- again, this is just -- there's multiple products that came over from the BlueHalo portfolio that are in this kind of coming out of, let's test it, let's see at this workspace after many years starting way back here at this is going to be the awesome most thing to reality to now to full adoption.

And there's multiple settings of this, counter-UAS RF or public safety purposes, counter-drone laser technologies on the AV side, it's a one-way attack drones, it's long-haul laser communications from the AV side. Again, we just got a $500 million contract for -- I mean nobody else -- if you think -- if you believe that laser communications is important for military purposes in long haul, then you've got to believe in what we're doing. So we have multiple products that are kind of just hitting this adoption phase. That's what's super excited about the story.

Yes. Do you think that the -- whether it's for the -- the one to 2 sites that you think you'll have online kind of in the near term versus just broadly what the opportunity is the full package of kind of layer defenses that you guys have just internally within your portfolio as a key differentiator? Or are you okay to just sell LOCUSTs to a -- to the laser weapons and then someone else can do the RF like how do you -- from a BD kind of go to market, how are you thinking about that type of...

We traditionally have not taken on the system integrator model. And we are doing this here. I personally would love to see it successful for this purpose because I do think we do have a variety of capabilities that as proposing solutions might be the best way for us to grow those products. It has not been our traditional route. I mean, we've done some stuff here and there. But more and more, we're seeing improving our capabilities and expand our capabilities in that kind of system integrator model with mostly our product and some other people's products.

As you have success on more, what you'd probably call, kind of classic critical infrastructure of military bases, DoD-type installations, and probably going to be -- I think, probably the most likely first candidates just given Golden Dome naturally leads you to more public critical infrastructure like utilities, other things. Is that something that you guys will also pursue eventually? And will that create like a new kind of BD-type motion for you guys, you haven't necessarily exercised before or how would that...

It definitely would be new. And so yes, those are things that are under consideration. How do we go to market? If every power plant in the United States needs some type of protection, that type of thing. We do -- the Titan product we do mostly today sell through resellers, and that would be a question of how should we do more of -- the more the reseller ourselves than other people.

Got it. Great. Time flies. And I've been chatting all the time. I'll make sure there's no questions from the audience before I continue on?

Are there any questions from the audience?

No? I can keep going. I have a list. Okay. Yes, go ahead.

So with [indiscernible] you mentioned like you're selling through resellers, like how much of the margin in the end that behavior [indiscernible].

Well, it's already the best margin product in the company. So I don't know, in some way, it could be closer to the same or maybe a little bit better, but you're probably going to be taking on a little bit lower kind of integration work as part of that. So maybe overall, if you said that business was -- goes from $100 million to $200 million. The margin might be the same or a little down because now you're incorporating more services in it. So I don't know what that looks like. But it's a great margin product as it is.

All right, I'll do one more. International business, you guys had a great kind of, I think, motion around that even before BlueHalo and put a lot of work in there. Now with BlueHalo, you've got, like we've talked about a whole host of new products that you can now take to those international kind of strongholds you've already established. What do you think you could be doing better, though as well as you've done there? What -- especially with all the -- just the new dynamics, let's say, around just other countries really taking more of their own destiny into their own hands. What do you guys think you should be doing just better on the international front, what might we see in FY '27 kind of...?

Yes, we're definitely adopting a strategy that gets us more in-country resources, either BD -- or business development or technical resources, some of these countries want some type of, I would say, manufacturing, at least assembly type of operation in country. So we're exploring all those alternatives. It wasn't as imperative for us before because we really had one main product we're selling internationally Puma. Then over the last couple of years, we've been able to sell Switchblades, but now we have a host of products we can sell into these countries. And so it makes sense for us to have a more localized at least sales and support operation versus a reseller network in country. So you'll see more of that in the next 12 months.

Great. All right. And we're in the kind of the red zone time. So again, if there's any other questions, otherwise, we'll let everybody [indiscernible].

Thank you, Trevor.

Thank you so much, sir. Appreciate it.

Thanks.

Good day and thank you for standing by. Welcome to the AeroVironment Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] 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.

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. .

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 Investors 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, 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.

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?

Thank 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. 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 U.S. 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. This also resulted in record second quarter 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.

Let me summarize our key messages for the second quarter of fiscal year 2026, which are [indiscernible] towards 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. And fourth, we're raising the lower end of our fiscal year 2026 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, NAV 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. 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 delivered 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 uncrude 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. 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 in an increasingly crucial role in U.S. 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. 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, 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 U.S. Army's long-range reconnaissance program or LRR estimated to be worth approximately $1 billion. Internal investments made on this group to 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 U.S. Army. We've also prudently invested in upgrades to our Group III uncrewed aircraft system, JUMP 20 and JUMP20-X, which was recently selected as 1 of 4 options on the U.S. 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 5 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 U.S. Army 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 tightened 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 loading 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 anti Armor solutions, ensuring warfighters maintain tactical overmatch in contested environments.

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 2 hours of flight, which has doubled the endurance of typical group 2 quadrotor UAV platforms. 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 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 U.S. 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 and AV's ability to deliver mission-critical solutions. We also just released 2 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 OpenJAUS. 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 interruptibility. In addition, AV won several key awards in our Space, Cyber & Directed Energy segment with critical new contracts and 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 who 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 and space. Additionally, AV secured a new firm fixed price option for 2 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 U.S. Air Force Research Laboratory to develop material technology and deploy protective solutions to the front lines to guard war fighters against exposure to harm for electromagnetic radiation. Work under this large program known as HELMSSMAN, will help the turn 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 war fighters 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 advance counter UA solutions, we're redefining the battle space. We have unseated incumbents with our locust laser weapon system and secured key wins like Freedom Eagle-1 or FE1, deliver cost-effective kinetic counter UAS solutions for Group 3 and 4 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 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 Chung-Shan Institute of Science and Technology, or NCS IST 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 and crude 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 JUMP20-X systems. The systems provide the kind of operational versatility that continues to grow in popularity in international markets.

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 Forces in North Dakota. 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. 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. 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. 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 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 sweet capabilities unmatched in the industry. This combination accelerates innovation and continues to position AV as the 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 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. Despite a challenging environment, we delivered a strong quarter. Our continued investment in R&D and capacity expansion is translating into strong growth in key program wins and positioning AV for even more growth in the coming years. 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. We're executing on manufacturing expansion and 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 second quarter financials. Kevin?

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 FY '26. While this quarter presented challenges in terms of the U.S. 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 on definitions for our customer contracting activity. Going forward, each quarter will present a report the total contract awards, bookings, funded backlog and underfunded backlog in the quarter. Now I'll highlight some of that customer contra activity in the quarter. As Wahid mentioned, we earned awards with totaling 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 at 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.

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. Legacy AV organic growth was 21% in the second quarter.

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 2 segments compared to pro forma FY '25 revenue. The AxS segment recognized $302 million in revenue in the quarter, which represented a 15.7% increase over the FY '25 pro forma revenues. Precision strike and counter UAS products led revenue growth for the segment with nearly 38% increase at -- nearly a 38% increase compared to the pro forma FY '25 second quarter results. Strong Switchblade 600 and Titan sales led to the growth in this Optigroup. On crude 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. On crude systems without Ukraine revenues grew more than 50% year-over-year, driven by strong JUMP 20 revenue increase. The Space, Cyber & Directed Energy segment recognized $171 million of revenue in the quarter, which was 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 locus 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 2 BADGERS for the U.S. Space Force's SCAR program. Cyber 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 nearly $500 million HELMSSMAN award among others.

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 FY '25. 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 -- the second quarter 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 onetime 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 multibillion-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 & Directory Energy businesses during the shutdown. However, we believe the adjusted gross margin should improve in 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 FY '25. 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 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. 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 a 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. EBITDA as a percentage of revenue was 9.5% in the quarter. Despite some of these onetime 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 per 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. As reported last quarter, we now have a completely new balance sheet as a result of the BlueHalo transaction and the convertible debt equity financings 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 that 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.

Finally, I'd like to provide you with our updated FY '26 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 FY '25 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, shifting the projected revenues to the right. 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. I'd like to close by echoing Wahid's remarks, we are very well aligned with the U.S. Department of Word 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. 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. 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.

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 world's highest priorities and sustained significant growth in a demand-driven market. The Department of 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. 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.

[Operator Instructions] Our first question comes from Greg Konrad with Jefferies.

Maybe just one on programs. I think you announced that you got 2 more BADGER units in the quarter. Can you just remind us how you're thinking about the current scheduled 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 U.S. space force for additional BADGERS, 2 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 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 actually improve in the third and fourth quarter 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've 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 that 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 and locus 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 revenue is 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 the fourth quarter.

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, comes through as a result of the shutdown that has been delayed, those product revenues are going to and task order is going to be received in the next 1 or 2 months. That's what we expect, and we want to convert those to revenues. So the volume goes up 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.

Our next question is from Ronald Epstein with Bank of America.

This is [indiscernible] for Ron today. I was wondering if you could -- in the past, you've given a breakout of buy products 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. And so I try 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 on that. 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.

Yes. I mean year-over-year, Switchblade by far is the fastest-growing product in the COES precision strike category. Overall, we saw significant growth, multiple x for the JUMP 20 in Q2 versus the prior year.

Our next question comes from Anthony Valentini with Goldman Sachs.

It seems pretty obvious you guys have massive growth opportunities here across the 5 to 10 different products that you guys have been highlighting, maybe like 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 backlog? Like what should people be looking for?

Anthony, yes, of course. I'll 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 risk 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 JUMP20-X 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 the third and fourth quarter of this year. The U.S. 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 U.S. Army. And we're also lining up a bunch of national customers for that product line.

The SCAR and BADGER program and product is also transitioning to production, and we're going to deliver more sellers, and we're going to ramp up revenue profile of that revenue was a 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 as our cybersecurity business, and that's primarily because of 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 U.S. DoD and administration strategies. The kind of business model and products and go-to-market strategy that we have is precisely what the U.S. Department of Board 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 is a lot of demand coming our way, and we're getting ready for it as we speak.

Yes. I mean, we think we're on the precipice of 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, like how do we square that with -- if I'm looking at the backlog in 1Q versus 2Q, it's slightly down. So I just -- can you guys help me understand like why that's the case? And should we see the backlog is like 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 6.

Well, I think it's pretty flat from Q1 in terms of the funded backlog. The underfunded 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 our 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 delay in some of the actual funding on these contracts.

Okay. And Kevin, do you have a number for like what you guys expect Switchblade to be in 2026. I know 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 facilities. So you can build plus or minus that, probably.

Our next question comes from Louie Dipalma with William Blair.

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

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 U.S. 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 then we're transitioning into production quickly. They're focused -- we're focused on all the right areas with the U.S. Department of Board needs and has major capability gaps. These are critical areas of gap, capability gap it's required for the future defense of U.S. 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. And we'll send the pace for everybody. So I think the sentiment is very positive and strong for AV.

And on this call, you've discussed many of your product lines, such as the P550, your BADGER with the SCAR program, 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 the larger number in your slide presentation. And I was also wondering, have you started delivering terminals as part of that program?

So Louie, I can only speak to that program at a very high level due to 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 U.S. 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. And we are one of the only companies that we know of that has been awarded a contract to 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. That is a massive, massive step forward for a company [indiscernible]. And we beat many of the major prime contractors are not competitive. And so there's 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 is 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.

The 2 [ 381 ] includes the options as 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 Louie, a vast majority of that contract is not funded yet. As Kevin said earlier, one of the reasons why our funded backlog nearly the same as last quarter, and it did not grow as much is because there's 2 things that has 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 at one. 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. So we expect a significant number of additional funded as quarters in Q3 and Q4, all of which is going to improve our backlog and will allow us to deliver more products and more revenue on third and fourth this year. Additionally, will set us up really well for fiscal year 2017. 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.

Our next question comes from Ken Herbert with RBC Capital Markets.

This is Peter [indiscernible] for Ken Herbert. Could you maybe discuss the margin profile of the CD&E segment? Is there maybe a time when you think that the adjusted EBITDA will be breakeven?

Yes. It will 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, consistent business and business model. Both of those 2 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.

Yes. And their product mix 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 a 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% is the goal for the year. And I still believe that's achievable goal.

Next question comes from Andrew Madrid with BTIG.

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 COAS, namely the Titan. I mean, can you tell us more about what the international opportunity looks like for these COAS platforms? I think this is about one of the first times we've really heard about it. Also, Locus be sold internationally. And then I guess also broadly, just how should we think about the margin distinction between domestic and international COAS sales?

So Andre, yes, the nearly $900 million sole source IDIQ contract, multiyear, of course, from the U.S. 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 of the low-cost direct energy solutions. This is a significant milestone because the U.S. 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 $900 million nearly ceiling for it allow us to deliver more products over the next couple of 3 to 4 years to our international customers. So that's a 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 U.S. 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 U.S. military does. So we deliver the product to the U.S. 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 directed energy for our Switchblade for one-way attack and for our core stent 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.

Got it. Got it. 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 we're -- as you know, we're ramping up production for Switchblade significantly already. We've already tripled -- double and triple the 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 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 $2 billion factory. And I expect that to even go higher than that because there is 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's 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 and our nonlethal UAS and other platforms that we have such as [indiscernible] 1, et cetera, et cetera. So we're setting the factory to be flexible and agile for a lot of our products, and we can shift production on that factory as we go forward.

Our next question comes from the line of Trevor Walsh with Citizens.

Great. Maybe just on AV halo a little bit. Wahid, great to see the new products or the new, I guess, module 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 -- how much of that do this 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 packages to go with those? I guess it's another way of asking kind of you have these wins around A halo now, but is there really a kind of much wider opportunity that's kind of going to, I guess, materialize later. Again, what's the actual hardware piece 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. 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. Halo Command, AV Halo Cortex, AV halo, pinpoint, et cetera, cetera. we launched 2 new modules, number one, and we're going to continue to launch more new modules to that. 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? 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 their modules already deployed in the field. That is the beauty of our system that is all notable and integrated. And so what we've done is try to actually bring the ecosystem cohesively together and mess it all together into one umbrella software solution.

Secondly, it is also at 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 U.S. Army, who selected us for the human machine integrated formation.

HIMF 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. And U.S. 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 see, it's going to be ours. And we are open, interoperable and we will integrate with many other systems that are better. And so we got a lot more coming in this area, and I can't be more excited about it in the future.

And we already support multiple platforms with our AV command.

We support not only our own platform, we support more competitor platforms today than our own actually. And that's the testament that 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.

Our next question comes from Jonathan Siegmann with Stifel.

Appreciate managing the shutdown. I thought that was great. And it's a really interesting time with signal flashing green here with a lot of intent of where we want to spend money, but with the shutdown causing a real wrinkle Historically, your January quarter hasn't been the strongest booking 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?

Yes. 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 cost quarters 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. And 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 first quarter and second quarter, and we are exactly where we want it to be, despite the fact that the whole industry was dealing with a month of complete government shutdown. And so I think our results are very good, and we're very pleased with our results, and we're looking forward to the second half of the year. we 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. And thank you for the details on the product lines, I appreciate it.

Our next question comes from Austin Moeller with Canaccord Genuity.

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 specific backlog by customer regions or by specific products. What I can tell you is the following. We have derisked and pivoted from our 2 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-end 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. 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.

Yes. 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 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 our Ukraine...

On our forecast.

In our forecast.

Okay. And just a 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 U.S. military in a long-range anti-armor, anti-Fc 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 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 2 product lines are going to grow significantly over the next few years. The demand for those systems are very robust from more than one service and more than one customer in 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.

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

Our next question comes from the line of Pete Skibitski with Alembic Global.

Just wondered 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 contract 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 U.S. Army and even other branches of the U.S. Department of Work 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 comment. What they're going to do is they're going to pick at least 2 players. And from those 2 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 a capability gap. .

We believe our solution set is the best performing. We have very strong fee from the customer that the customer is extremely satisfied with our systems. Yes, we announced a couple of quarters 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. We believe that P550 product is a $1 billion-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. 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 [indiscernible].

Got it. Okay. Very helpful. I appreciate that. And just on the P550 specifically, are you clear 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 inoperable and compatible and compliant. 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, but we can -- we believe that we can sell the P550 to almost every customer that we sell are 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.

Our next question comes from Colin Canfield with Cantor.

Maybe just figured it all home to cash and profitability. If we can kind of think about the building blocks of EBITDA, I think the 4Q 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 Street is probably close to free cash flow breakeven 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 picked book and ship business can allow you to hit something like that in terms of free cash flow?

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 in the volume is going to help make a 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.

Yes. And I gave color in my 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 for the second half of the year. So -- 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 prior -- or even today, and that -- those reflected -- are reflected in the numbers.

Got it. And just to clarify, is it fair to assume that your free cash flow breakeven this year?

Well, we're looking for 50% -- it depends when you define all that, but we're looking at 50% cash conversion to our EBITDA.

For the year.

For the year.

Which is a significant improvement over last year.

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

It comes from Peter Arment with Baird.

Wahid, could you -- maybe we'll just touch upon the cash comment that you guys just talked about it. precision strike kind of product revenues were up 68% for the first 6 months of this year, but unbilled continues to grow. And I thought we were under a new contract or payment schedule. Could you maybe give us a little more color what's going on there?

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