AeroVironment, Inc. Aktie

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.

And the revenue over time, a portion of our overall revenue is also increasing, primarily because of the blue halo and that also is playing a factor in this equation, Peter. And just one other comment to make on this topic is that we're really more focused on the top line growth and making sure that we capture the opportunities and not lose momentum on the significant upside that we have in our long-term plan. So we're really optimizing to make sure that we deliver for our customers. We deliver capability, develop the products. We're anticipating a lot more task orders in the second half of the year. And so we have to really start building products in advance. We can't wait until the last moment. And while we're taking not all the risks, but we are taking some calculated risks to position ourselves to deliver for our customers because we know that they need these systems very desperately.

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

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

[Operator Instructions] The question comes from Austin Bohlig with Needham.

Congrats on the nice order fall through even with the government shutdown. But my question has to deal with kind of the full year guide with this anticipated funding coming from the [ OBD ]. Is it fair to assume that anything that flows through that you're expecting is not yet baked in to your current full year guidance?

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

Got you. Got you. And then just kind of some specifics on kind of like where are you hoping that these new contracts come from within your product portfolio? Is this precision strike, UAS, counter UAS?

So Austin, it's a very nice, nice portfolio or basket of contracts and award that we expect. It's basically the critical areas that the U.S. DoD needs them desperately and we've been talking about. So P550, more Switchblade more one-way attack, more counter UAS, more directed energy, more SCAR and BADGERS. And those are the key areas that we expect more of in our second half of the year. there's obviously orders for cyber and other businesses, too, but those 5 or 6 categories make up the lion's share of the expected additional contract awards and task orders for the second half.

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

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

Sure. So we expect -- first of all, the comment about the change in policy, absolutely. We believe that the new policy and definition that the U.S. Department of War and government came up with how they categorize drones and how the categories loading munitions and one we attack is very favorable to us because they're trying to lax the definitions as to how it's treated versus a true missile that goes very long, long distances, and it's categorized as a missile. So an arm drone or on FPV is not categorized the same. That is going to help us significantly over the next 2 to 3 years. It's not really immediate, but it is over the next 2, 3 years.

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

And this concludes the Q&A session. I will turn it back to Denise for final comments.

Thank you once again for joining today's conference call and for your interest in AeroVironment. As a reminder, an archived version of this call, SEC filings and relevant news can be found under the 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 today's conference call. Thank you for participating. You may now disconnect.

Good morning, everyone, and thank you for attending today, Goldman Sachs Industrials Conference. We're really excited to have AeroVironment with us today, both CEO, Wahid Nawabi, and the CFO, Kevin McDonnell.

So let's kick it off. I want to spend the majority of the conversation talking about the longer term, but I would like to talk a little bit about some of the recent happenings with the DoD. And what I think would be a good idea to start is to talk a little bit about the government shutdown, any impacts that, that has had to the business although it's short term and maybe specifically on order flow.

Sure. Thank you. Great to be with you. Thanks for having us. Obviously, shutdown is not good for anybody in the industry. We're in our quiet period because of the second quarter results, which is going to come out about a week or so. So I'm not going to comment on Q2 results specifically. And we have, by the way, our -- the statement on the...

Safe harbor.

Safe harbor statement disclaimer on our website. And please read that, if you can, on our website. It's here as well.

Generally speaking, the -- we said at the beginning of the quarter that we are in the right categories. And we -- obviously, it's not good for anybody, but we're going to be, generally speaking, we should be looking okay at that time. That's what we said last quarter. And so I can't make any comment on that specific because of the quiet period of the quarter.

Totally understand.

Fundamentally, long term, it should not matter. If you ask about long term, there's lots of funding that's going in our categories, a tremendous amount of money, and I don't think that's going to matter.

Is there a way to think through the percentage of revenue in any given period that is from orders in that period?

Not a lot. Usually, the orders -- there is some in the BlueHalo side when we bought the company because their services business -- the services business, the engineering, high-end services, even though engineering services when -- if a customer says that we can't actually authorize you to do the work, then you have to stop the work. And that's what -- could affect short term. In terms of products, we are high churn, but not that high churn in terms of 1 month or 2 months' worth of period. Usually, it's about 3 to 6 months long.

Okay. That's helpful. Maybe to shift to Russia, Ukraine. It seems like there's some talks now about potentially there being a ceasefire and some sort of agreement. I know that you guys have done a great job diversifying your business away from some of the Ukraine spike that you had a few years ago. How should investors be thinking through what Ukraine will be this year? And then going into calendar year '26 and beyond, what is the new baseline for that business?

Yes. So the Ukraine really positive effect for us was 2-plus years ago. It was 2 years ago that we got a bump in that. We always said that as soon as that starts, we're going to pivot and switch over, pivot to other areas and diversify. Last year, we said that it's going to be less than 10% of our revenue. And this year, it will be even less than that -- less than 10%, probably less than 5%. So Ukraine fundamentally is almost a nonissue, and it relates to -- related to our financials this year. The main reason is because we've already pivoted besides pivoting ourselves, the U.S. DoD and our allies have a tremendous amount of demand for the things that we make. So we're positioned really well for a lot of that demand that's going to come in the next 2 to 3 to 5 years. And essentially, Ukraine has become a nonissue, insignificant number, nonmaterial in our financials.

Yes, that makes a ton of sense. And that's a great segue. There's been a lot of talk about the replenishment demand that's required on the back of Russia-Ukraine conflict and then also some of the heightened conflicts that are happening in the Middle East. Is there a way to think through what that demand looks like over the next 24 months? And maybe like how long it will take for current production to refill or like to replenish that inventory?

Yes. So that demand is really fundamentally a massive, massive sort of wind in our sail, if you ask me. What's happened is 2 or 3 things. Number one, drones, floating munitions, one-way attack from Group 1 through 3 has become a very standard part of the military's operations and needs. So whatever the militaries of the world -- our military and as well as our allies had, it's probably going to go up to 10 to 50x higher, not 20%, but 10 to 50x higher, number one.

Number two, vast, vast majority of the inventories of the U.S. DoD and our allies, European allies specifically, is completely depleted because they've basically given a lot of that stuff to Ukraine and are utilized.

So the third thing is that because of the funding process and the budgeting process being delayed so much, the money hasn't actually arrived to the accounts, but there's billions and billions of dollars that are actually focused and programmed towards long-range programmatic acquisitions in our category.

So we expect that demand to be significant over the next 3 to 5 years, a; b, the second thing is that you've seen from this quarter in the last quarter, the amount of long-term sole-source IDIQ contracts that we've won. We've announced over $2 billion worth of contracts just in the last 3-plus months. And these are all sole-source IDIQ contracts with a total contract value of that amount. But the funding for those has not come in yet because the money that Congress approved for reconciliation, for example, hasn't received arrived into the accounts of the customer to be able to actually then authorize us to do that. We have been building in advance of that this year, and we're going to continue to do that. So majority of that demand is going to come in the next 6 months to 1.5 years in terms of orders and funding. And then we will continue to deliver over the next -- obviously, every quarter, but for the next 2 to 3 to 5 years maybe.

So I think that we're just at the beginning of the cycle of the militaries first realizing we need to equip ourselves with a lot more of these things, a; b, a significant amount of dollars being shifted, tens of billions of dollars, to these categories and then stockpiles are depleted, and we're positioned really well. And the thing that really matters the most is whoever can produce now and whoever has ready products that are relevant and they work in the theaters and the kind of conflicts that we have; they're going to have the lead -- the biggest and best advantage. And there's no one that I can think of that is positioned better than us. I mean we check all those boxes really well as a company.

I mean it's just as much about a shift in warfare as the replenishment story though. It's not like replenishment is going to happen, and that's going to be the end of the cycle. We're in for a long haul here of decades plus of building up the types of categories that we're in, in UAS or lethal weapons or things like this or counter-UAS. So we're just at the beginning of a cycle of a shift in warfare.

Understood. Wahid, you just made a comment about like the funding isn't into the customer's account yet. What's stopping that? Are you talking about the reconciliation bill funding?

Correct. Yes. So the reconciliation bill that was passed, obviously, the shutdown happened right after that. And we have experts within our company that has actually been part of that process on the customer side, the department, the various offices of management, the budget, et cetera, et cetera. And we know the process. We know exactly how the money gets flowed, authorized, approved, appropriated and then makes its way. And so based on our real close contact with all those different touch points, we have not seen the money flow through yet. And so the effect of this shutdown on the government side was significant because a lot of the folks that are actually working on these things, administrative folks, literally were not working. And so that is going to take not a long time, maybe another 2 to 3 months, but it's going to flow into those accounts quite soon. And we've been given a lot of indicators that you got to get ready, and that's why they've actually put the contracts in place, a couple of billion dollars within 1 quarter, and there's more coming down the pipeline.

Now those contracts are not a 1-year contract. Those are 2-, 3-, 4-, 5-year contracts. As Kevin said, this is a seismic shift in the market as to how the categories that we play in is going to be part of a bigger force structure.

Yes. So talking about shifts in the market, I'm curious to get your thoughts on Hegseth's recent announcements about the transformation of the procurement process. And whether it's a way to kind of push the primes along and kind of give them enough of like a demand signal so that they can lay down investment for future demand? Or if it's more of a signal to them of, hey, the commercial model that a lot of these defense tech players like your company are deploying is where you need to start shifting to. I'm curious just on your take of like what the goal is of that and whether it's better for you guys or for the defense primes or how you see it?

Yes. We are absolutely jazzed about that because the recipe that Secretary Hegseth is talking about is the recipe that we actually have been following and implementing for the last 2-plus decades. If you look at our financials for the last 2 decades, ever since we've been public, our investments in R&D has been high, our EBITDA margin is relatively higher than most of the industry players. Our growth rates have been higher and primarily because the recipe has been to invest ahead of the requirements, in fact, help the customer develop the requirements based on innovating and disrupting the market. So that is fundamental to our strategy and DNA.

Now what you see is dozens and dozens of other companies that are trying to copy the same model. In fact, lots of them benefit from very high valuations because they believe that this is the future. And so in our view, we welcome that. We've been playing that game, so to speak, or that strategy for the last 2 decades. And we love it, number one.

Two, because our systems are readily producible today and we have systems that are relevant from the latest set of conflicts that are out there, Ukraine, Armenia, Azerbaijan, Afghanistan, et cetera, we stand to be the leading player to benefit from this because our system is the easy button to push. So we look forward to that actually.

Yes, that makes a ton of sense. Let's talk about Golden Dome for a second because it seems to me, similar to some of the comments that you were making on the funding is there, but not in the customer account. I think people are expecting that we were going to have -- like the investment community is going to have an understanding of what the architecture was going to look like by the end of November. Like how should we be thinking through when we will know what it's going to look like? Whether it's completely new incremental funding with that $25 billion? Or if it's like repackaging existing things under the Golden Dome umbrella? What are you guys hearing? And like what should we be looking out for?

Sure. So let me make a couple of points on this topic because it's somewhat misunderstood and not well understood in the industry. The Golden Dome effort initiative is a very large effort. There's lots of pieces to it. We're not trying to solve the entire problem of the Golden Dome. We're focused on a very specific part of the Golden Dome, the inner layer defense, what we call the Halo Dome. The Halo Dome is our currently available solution set that's off-the-shelf, commercially available that's actually already deployed. It includes our RF detection systems. We have RF jamming systems like the Titan, our counter-UAS for direct energy, the laser systems that we have called LOCUST, our software suite of products such as AV_Halo and AV_Halo COMMAND, et cetera. So that is the layer that we're talking about.

So the bigger piece or another piece of that is the space and above, group 5 hypersonic and above type of capabilities that we want to defend against. So we worked and we partnered with SNC to actually develop the solution set. And we -- as late as yesterday, I had meetings within the Pentagon related to the specific topic. So that's what Golden Dome is about, and that's what our solution is about to address a very specific but very important part of the Golden Dome initiative and strategy and objective.

Second thing is that the money part. The money -- the way the department is thinking about funding today, they don't have very specific dollars as to where they want to buy -- what they want to buy and what they want to spend money on and how much it's going to cost. So they are getting budgets and funding for large categories from Congress that allows the department to then actually make decisions as to how to deploy the funding and capital into what areas.

So there's lots of flexibility within the DoD -- DoW on how to move money around from accounts to accounts on different categories to be able to spend that. And so the dollars, there's certainly going to be billions of dollars spent on Golden Dome. Certainly. No question. Is it going to be $50 billion or $25 billion or $100 billion? We don't know. And in fact, the department has very good ideas, but they still haven't defined specifics yet.

But we're very involved in that category. We believe we have a very good solution. The reception from our customers has been significantly positive, very positive, and we continue to actually work with them in architecting the solution set because it has to fit as a jigsaw puzzle as a whole. All layers across the whole domain, all domains, and we look really good because our solution set actually is relevant. It's commercially available. It's already deployed. We're actively engaged in these things, including the southern border of the United States and other sites. And so we're just waiting for the department to work through its design and efforts to then basically fund it and go forward. And there's also a question of how fast the money comes from the accounts to hit the accounts as well.

Right. And in addition to that, we will benefit other areas of business like our BADGER business and our [ space com ] business and things like that, where all these areas will see increased investment over time.

Yes. Okay. I want to get to the products and the growth. But before we do that, I just want to get one last one in on the funding environment.

Sure.

What do you think will happen with the budget next year? Is it going to be the base budget plus some sort of growth? Or is it the base plus the reconciliation with some growth? Or is it that there's going to be a base budget growth and another reconciliation bill?

I really -- I'm not an expert to be able to comment on that specifically. What I can say is that whether the budget is flat or higher, I don't personally have a very strong knowledge of that or opinion on that. But what I can tell you is that the categories that we play in is expected to be funded very aggressively, very aggressively. And I see not like 1, 2 single-digit percentage growth in our categories. I see significant, in some cases, actually order of magnitude more money being reallocated from other areas.

As Kevin said, there's a shift in warfare. The 2 to 3 areas of the U.S. DoD and all of our allies are really focused on to double down and emphasize a lot more. It's this war of drones, right? We see it every day. And so that fundamentally is what we are as a company, unmanned systems. That's one area. Directed energy space, RF jamming, counter-UAS, one-way attack, these are very, very focused areas that the department is going to invest billions and billions of dollars more than what they did before. I mean, one-way attack 3 years ago was a 0 market, almost none. So all of a sudden, it's turning into billions and most likely they become tens of billions of dollars worldwide in the next decade. So whether the budget is flat or slightly higher, I don't have an opinion, but I do know that the areas we're in continues to get significant funding.

Yes. And I think what I'm hearing from you too, is that, one, you don't make the decision on the budget, right? But it doesn't really matter. Like the stuff that you are involved in and you're aligned to is going to grow regardless based on the demand signal.

Absolutely.

So I think that, that's important.

Yes. And we're such a small percentage of the total overall budget. As $1 trillion budget, we're a very small percentage of that whole budget. And -- but that budget is probably going to double, triple, quadruple. It already has. We're -- another indicator to realize, if you look at our business today, we're involved in a dozen different billion-dollar programs of records. And we've mentioned many of these in several quarters, right? And we have a very high win rate. And we're generally the #1, #2 contender for these programs. So if you add that up, it's several billions of dollars of opportunity over the next decade or 2.

What is the win rate?

Generally speaking, we are rarely -- if we engage in a program, we lose a competition, it's high 80s up to 90% generally. It's very high for us usually.

And does that make you think -- like in a strategic way that maybe you should bid on more things and it should be a lower win rate? Or is that like your 80% to 90% is like your sweet spot, you guys are comfortable there?

Well, it's really not based on because our win rate is high, let's go after more things. We do it because we're very disciplined and we're very focused and systematic on how we go after things. If we believe that we have the right solution and there's a market and there's an opportunity and we can have a differentiated compelling solution that we can then defend long term, and you could see that in our margins, you could see it in our profitability, you could see it in our growth line, we then go after it.

And because we're very methodical and systematic in my view, it, itself, lends to an outcome that has been very, very positive. And so if you look at the programs that are out there today, we're the leading contender, and there's a couple of them that the government actually just announced. LRR is a great example, Long-Range Reconnaissance. Our P550 is purpose developed and designed for that particular program of record opportunity for the U.S. Army. That's a $1 billion opportunity just with the U.S. Army alone. And most likely, internationally, that will be a $2 billion product over the next decade. And so we're very focused on where we think things are going to go and how we should go after it and make sure that we win.

And when you're talking about those numbers, the $1 billion opportunity, the $2 billion opportunity, that's not annual, right? That's over -- over 5 years?

Over 5 years. That's right. The Army is actually published already. What is the force structure implementation of the -- that solution set, the LLR? If you add up the number of systems that they want to deploy, it comes out to about $1 billion worth of acquisitions over the next -- and the time frame is about 3 to 5 years. And so they would buy most likely as fast as they can as whoever can produce it the fastest. And we're the only 2 contenders left. And we were already down selected. And so in my view, that's a perfect example of the kind of programs you're going to see that we're going to be engaged in. LASSO is another one. That is a U.S. Army program for the loading munition for Switchblade 400, 500 that we actually announced at the last AUSA conference. So we've designed that product specifically for that mission and for that requirement.

Makes a ton of sense. The biggest pushback that I get broadly on defense tech is that, right now, it's difficult to measure and model out what each of the different products can potentially grow to. And I guess my question for you is we pick 2028 or 2030, whatever the right time frame is, what are the maybe 5 biggest product lines, programs, growth vectors for the company? And how should investors think through modeling that out between now and then in the ramp-up? And maybe Switchblade is probably a good place to start given, sure, you just mentioned it and the fact that you guys are building the new facility in Utah with the new production facility?

That's right. So it's not that we don't want to help our investors and the market and yourself and others to build the most accurate models possible. We would love to help as much as we can. First, and we -- I'm going to try to answer the question in more detail. But first, let me describe the backdrop. Our strategy fundamentally is we're going after very large categories that we can disrupt and be the leader and innovate and have high growth and high value creation. We've got a dozen-plus shots on goal, literally a dozen plus, that we're actively pursuing. Each one of these opportunities is $1 billion, slightly less than $1 billion or a couple of plus billion dollars large.

In terms of the total opportunity?

Total opportunity over the next 3 to 5 years. 5 years, call it, right? LRR being an example. LRR is one of a dozen such opportunities that we're involved in. And we have a leading position, 1, #1, #2 in most of these things. In some cases, we're the only player. Like SCAR, as Kevin mentioned, we've been already selected. So which one is going to happen when is incredibly difficult to predict in terms of timing. That's the fundamental reason why we don't provide that level of granularity because it is really difficult to be able to time that from the customers' behavior and processes.

And Golden Dome is a perfect example.

Golden Dome, exactly. LRR, et cetera. Exactly. Now having said that, these are -- there are certain areas that I can very confidently think that over the next several years, it's going to be major contributors to growth, okay? Number one.

Two, overall, our business has the ability to be double the size we are easily over the next 3 to 5 years, easily. Our own internal long-term planning process tells us over and over again that we are absolutely in this mode. And if you look at our track record, it actually also suggests that we are able to deliver on that CAGR that we have talked about, both on top line and bottom line.

So the best way to look at it is, you can decide which one you think is going to happen, but I can give you a basket of things that's going to contribute to the growth. The categories are loading munition, like Switchblade, is going to be big. We already engaged in multiple programs. And we've got 10 to 20 different international customers that are lined up. They are going to buy Switchblade. They already starting to buy Switchblade, and we've been announcing those left and right.

The other category is one-way attack, the products that we've announced in that area. The other area is SCAR and BADGER. That's a program that we've won. It's $1.7 billion worth of funding that's going to be put into that to modernize the entire U.S. space satellite, geosynchronous satellites with our systems phased arrays.

Counter-UAS, RF jammers such as Titan is going to be a very key contributor to our growth. The LOCUST directed energy system, long term, should be a significant contributor to growth. We have the world's best solution in that category and almost every single one of these actually. And then another one will be laser communications. We just announced a program that was very significant, tune of almost $0.5 billion plus, and we were selected as the company that is going to essentially provide that capability to the U.S., okay?

And so these are fundamental categories that I believe -- the 2 I want to mention is our small UAS, which includes JUMP 20, JUMP 20-X and P550, absolutely is going to be also another contributor.

So if you look at our portfolio, pretty much almost every product line in our portfolio is going to be growing. The only one that I think is not going to have above average growth is most likely the cyber, cybersecurity that is really people oriented, that's very exquisite capabilities that we have. That is not going to have hyper growth right away. But the rest of them are all going to contribute very handsomely to the overall growth of the company, and we believe that we're going to continue to deliver on that growth. Do you want to add anything else?

Yes. I mean, we're looking at 15% to 20% growth over this time. And as Wahid said, I think doubling in the next 3 to 5 years is very realistic for us. All those categories he mentioned, all have the potential of being close to $1 billion in themselves. So that's not even perfection to double in that amount of time.

Yes. And even the question that we struggle with ourselves is, should we invest more and accelerate investment even more to have even higher growth than that? The likelihood of us having higher growth than what we were even expecting is way higher than the opposite. So -- because we're sitting in such a great position in the market. I mean in my career at AV, it's never been this great in terms of the...

It's a good problem to have. Yes.

It is a perfect storm of how things are lining up and how we're positioned to benefit from that trend.

Does that mean that you guys would consider increasing the level of IRAD as a percentage of sales? Or are you guys comfortable with the level that you're at?

For this year, we're comfortable where we're at. Absolutely, there is demand for a lot more, a lot more. And we have always said, Kevin and I have on every single call that, that's a level that we believe is a very strong indicator for the long-term higher growth. And so we've been high in general, relative to the industry. But I think this year, we're okay. And over time, I believe there's opportunities for us to even go higher if we needed to and also go lower if we needed to. So we're going to just play year-by-year to see how the customer and the market reacts, and we're going to play it accordingly.

Perfect segue there to the margin discussion. I think there's just a lot of debate broadly with defense tech that there's a narrative that because there's more IRAD spend, there's more commercial pricing, and therefore, the margins can be higher. So I guess my first question is, when you're thinking through that decision tree of should we increase our level of IRAD, is the expectation that you will be able to get higher margins on the back of that?

And then number two is, when you guys get through this growth spurt that you have here, given that a lot of the business today, I think, is already commercial, where do you think you can get margins to? And I'm not trying to give you a -- not looking for an exact number, but like a framework, are we talking about 20% to 25%, 20% to 25%, 25% to 30% on EBITDA margins, would just be helpful.

Yes. So look, we think that our R&D investment is going to continue to be high because we see so much growth, and that's a fundamental part of our recipe and our strategy and our business model. Where we're going to get scale is by having larger scale of operations in production, supplier input costs, variable costs and fixed costs are going to probably be lower. SG&A as a percentage of revenue could be lower. So we will get synergies in those areas.

Now lastly, I do believe that because of our recipe over the years, you could see our margins, we've been very successful at not only maintaining but it's actually increasing, in some cases, our gross margin percentages overall. And our EBITDA margin, really, we're high. Relative to the market, we're much, much higher.

Yes, the highest in the industry.

Could we go higher? Yes. But the challenge for us, not challenge, the real question is how much do we invest in the long-term growth because we want to capitalize on this 5- to 10-year trend very aggressively and very strongly. And so that tells us that we need to keep the R&D investments high enough until we think that we need to lower it so we can increase the margin. So overall, I think that the margins could be high teens. Could it be above 20%? Sure, it could be. But we are trying to balance between short term and long term primarily in the R&D space. I'm not sure if you have anything.

I would totally agree. I would say to remember that things like LOCUST, BADGER are going more to products and more commercial pricing over time. And so with that, you might see higher gross margins, but a little bit higher R&D percentages. But we're definitely committed to at least where we're at, if not a little higher, as those gross margins expand a little bit. But hopefully, at the same time, increasing the adjusted EBITDA percentage.

And it seems like the international demand is really strong. Is it right to think that the margins on the international business are higher than domestic broadly speaking?

Absolutely. It always has been, and it should continue to be so. Because the U.S. DoD is our biggest customer, we negotiate a lot of the contracts with them first. They're the first adopter of these systems. When we sell internationally, both FMS and DCS, which we actually sell in both categories, and we're very successful doing that, probably one of the most successful companies that have been doing that for a decade plus, the margins are higher. DCS sales internationally is, by far, the highest margin. Yes. And those margins will continue to be very positive, and that should contribute to the overall mix and help the margins be strong as well.

Okay. And then sticking on the margin conversation and maybe just a little bit more towards pricing. I know that we've spoken about this before, but there's a narrative that now that there's more competition in the drone space and maybe I think it's specifically on Switchblade that, that could negatively impact pricing over time and there would be margin degradation. I'm curious of how you guys think through that narrative and why you think that's not true. It seems to me like the capability set is just completely different, but I'll give you the opportunity to answer it.

Sure. So I've been with the firm for 15 years or so, a little maybe more, I've heard that argument from the day that I joined the firm, which is, by the way, it's a valid argument, right? You -- hey, it's a legitimate argument. But we have demonstrated over and over and over and over again that we can maintain our margins, number one.

And then the second question is also, there's this thesis that these new players are coming in and they're going to offer lower-cost solution and they're going to beat us. We do not lose on price. We are the price leader in the market. We are the largest producer in those categories as well. And so time and time again, we actually win against players that claim to be lower priced. In fact, I can give you examples after example after example of companies who've tried to compete with us that are no longer in existence because they went out of business not being able to actually compete against us.

I was talking about one of them last night. It was a company down in Florida. I won't mention them. But for a decade plus, they try to copy the Puma. And the performance of that product is nowhere near. They eventually went out of business, okay. It's just several -- we've seen -- I've seen a half a dozen to a dozen international players. In every country that we compete, whether it's Puma or P550 or Switchblade, there's at least 1 or 2 or 3 other international players that claim that they have a similar solution with much lower price. Show up in the competition, we prevail, we win.

And so we are the lowest cost producer. We have been able to successfully maintain our margins. And the last point I want to make is that we have an incredibly strong competitive differentiators and compelling value proposition. For competitors to come and unseat us in these areas, it's not easy. When you have an army that uses several of your products, and we have software stack, avionics, a vertically integrated IP and technology stack, it becomes a very, very differentiated heart to actually unseat and replace. That is something that we work on very, very strongly and systematically all the time. That's why we invest in R&D. That's why we invest in our family of portfolio of solutions. That's why we have common controllers for our product lines and our competitors. So I believe that we're in a very good position when it comes to that particular issue.

And is there a risk? There's been a lot of headlines about there being like trade deals essentially where we're going to be buying -- the U.S. and allies will buy drones from Ukraine given that they have capacity, something like 1 million -- I forget the number, but it's very high. Do you guys see a risk to that? Or is it more that, that's more of there's like bargaining chips and political negotiations that are going on with that and it kind of doesn't really matter for your space?

It's definitely the latter, number one. Number one, a lot of it is positioning, posturing, and part of it is also on the Ukraine side. They want to sell this stuff, and they all want to get aid from U.S. and other things. Other one is U.S. wants to do that, too.

Secondly, the most important point, if you add up all those things, most of it is talking about these first-person view, FPV drones. That's less than like 5% of the budget. That is not where the value is. That's not where the market is. It is a very marginally small portion of the whole thing. In fact, an RFI came out, I think, this morning by the U.S. DoD that they're going to buy maybe a total of like $1 billion over the next 2 to 3 years. But if you do the math, it's like -- it's insignificant compared to the launch. And being able to actually have a business model to successfully make money in that category is not easy either.

The war in Ukraine is very unique and different than what the kind of conflict that we're going to fight. They're making drones and they're using it next week. You can't do that in the U.S. DoD. There has to be systems that are going to sit on the shelf and stockpiles for months, if not years. There is a whole different set of requirements that goes into that.

We're not into this close-combat fight which is shooting within a mile of each other. We had a conflict with China in the Pacific or somewhere, we're talking vast, large distances. They have to be marinized, they have to work a lot more complexity than those. Now I'm not deemphasizing that, that would not be part of the solution set. It will be part of the solution set, but it's a much, much smaller portion of it. And we've intentionally decided not to play in that market because we believe the much better value is all the other things that we play in, which we're the leader in.

Incredibly helpful. And we have about 40 seconds here. So I'll ask you my last one. Maybe just like an update on BlueHalo. It seems like there's been a ton of positives out of it, especially given all the application for Golden Dome. But now that you guys are about 6 months into being a part of the larger company, can you just give us an update of how it's going? Is it -- is there anything that's been much better than expected or worse than expected? That sort of thing?

Sure. Well, overall, we're incredibly satisfied and very happy and pleased with the acquisition. It's been tremendously good. We're aggressively integrating the 2 companies and businesses and product lines. We're doing very aggressive, deep integration.

In terms of the synergies on the cost side, we committed -- we predicted about $10 million a year for the next 2 years. We're ahead of that. All of our projections show that we're actually going to overachieve that. We are -- generally speaking, we're doing great. The categories that play in, you've seen some of the wins that we've announced, we've invested over $1 billion worth of contract wins over the last 6 months that we've been together, less than 6 months, just as a result of the fact that Blue Halo is part of AeroVironment in AV.

So I believe that we're doing great, number one. It was a great move for us as a company, and we're going to continue to give you guys an update on that, and we look forward to it.

Has there been challenges? Of course. There's -- it's part of doing acquisitions and integration. But we've chosen to go very aggressively. The cultures are very similar. The businesses are complementary. We're even mixing not only leadership and organization, but also product lines are being integrated together. And so we're very pleased with that overall, and we're on track and sometimes ahead of schedule.

Yes. It seems like it's been incredibly successful so far. So thank you guys so much. We really appreciate your time. This was excellent.

Thank you.

Thank you.

Good morning, everyone. It's wonderful to see so many of you here in beautiful Albuquerque, New Mexico.

Welcome to our Space and Directed Energy facility, where we've developed and built products such as the BADGER, Locust and laser communication terminals.

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 and Presentations section. Wi-Fi passwords are located on the tables in front of you, and we ask that you please silence your phones at this time. In the event of an emergency, exits are located on your right, restrooms are located to your left at the back of the auditorium.

As you can see, we have a full agenda for today. You'll gain perspective on our view of the overall defense industry and specifically the defense tech sector, learn more about both of our segments as well as take a deeper dive into our comprehensive software solution, AV_Halo. We are most excited, however, to showcase the products, solutions and opportunities in our Space and Directed Energy segment. Before diving into presentations, please enjoy a short video highlighting all the amazing products and solutions AV has to offer.

[Presentation]

It's now my pleasure to introduce our Chairman, President and CEO, Wahid Nawabi, who has been integral reshaping the company's strategy by driving growth and profitability with leading-edge technologies and solutions in the defense technology sector.

Thank you, Denise. Welcome, everybody. I just wanted to, first of all, thank all of you. You're highly in demand. You've got very busy schedules. You manage a lot of money and a lot of folks retirements, et cetera. So the fact that you've taken the time to come here in Albuquerque, New Mexico to be with us is an honor. And our goal is to make this the most memorable sort of open house Investor Day in your career, if not at least for the year. So thank you for that.

I also want to thank our team, Denise, there's a whole bunch of other folks within Mary's group and Albuquerque that has actually organized and put this together. We've tried to do this always at a shoestring budget. But as AV's culture, we try to punch above our weight. And so I think they've done a fantastic job. I want to thank Mary, your team and the rest of the team members here as well as Denise.

With that, my piece is really short. I have an overunder bet with Kevin that I will stay within my 10-minute time line. The reason why it's short for me is because I just wanted to share with you 3 key messages or 4 key messages. Number one, this is a once-in-a-generational opportunity that AV is faced with. In my personal career of 35-plus years or so, there's only been one other time that I've been in a situation like this where all the stars are kind of lining up. And what is that lineup of stars that I'm referring to. Number one, U.S. and our allies have underinvested for several, several years, almost 1.5 decades to 2 decades. We were -- if you recall, during the first term of Obama was called sequestration. So there has been an underinvestment in defense in general. That has forced industry to consolidate into 7 major primes which nobody on earth really is totally satisfied with. You hear that every day on the news everywhere.

You all know that, so I don't have to explain all that to you. There is an eminent set of threats going on globally. The world is not a safer place than it was a few months ago or a few years ago. There's all sorts of conflicts that are rising, and they're actively engaged in U.S. today and our allies around the world.

The fight between U.S. and China is becoming more and more focused and sort of front and center in terms of the competition. And the other thing I want to mention is that the current administration, both houses of Congress both parties unanimously support investments in this area. And there's a very significant shift in mindsets of military leaders around the world about what the future wars and conflicts are going to look like. It's going to be a lot more autonomous systems on the edge of the battlefield connected together, integrated with autonomy and AI to achieve missions and basically to provide superiority for our war fighters.

That's precisely how we've built our company over the last 1.5 decades. We have deliberately selected pieces and invested in areas to position us for that particular future. You could call that to some extent, lucky, but I truly believe in the definition of luck is when preparation meets opportunity or the other way around, opportunity meets preparation, right?

I mean we've been actually working on this for a decade plus because we firmly believe that these robotic systems on the edge of the battlefield in all different domains from space to underwater and cyber, connected with AI and autonomy, all at large scale will make a much bigger part of the defense spend overall. Right now, you could argue it's probably 5%, 10%, if that, of the $1 trillion budget that the U.S. spends in the entire defense budget. It should easily triple, quadruple in dollars over the next 3 to 5 years. That's just -- you guys know this actually better than I do because you do this for a living. But that's my personal view that that's what's going on.

And so will there be one winner? No. I believe there will be multiple winners in this endeavor. And the companies who are relevant that can answer the mail on those things that I mentioned, number one; two, have strong balance sheets and financial means to be able to actually scale and deliver, have done -- they have the proven ability to actually cross the chasm and go from prototypes to full rate production, has the scale to produce in volume. And that's a very challenging question because the definition of volume is debatable.

Are we talking thousands, tens of thousands, hundreds of thousands or millions? And no one really knows exactly, including our customers. But in every category that they're spending money on, it's going to be orders of magnitude more in the next 3 to 5 years. And so the winners, the folks that are positioned and prepared and qualified the best that has those attributes and have systems that are relevant in the fights that is actually effective in the field and you have the ability to scale and produce those are probably going to have the highest chance of success and a larger share of the wallet of the spend.

And I am proud to say that AV is one of those top companies, if not the top company in that list. And so that's fundamentally the message in this one slide that I wanted to provide to you guys. And the second slide, it sort of paints that picture even more. If you look at the large primes, the 7 large primes. Generally, their strong suit is experience. We've done this. We've done that before. We've built the biggest aircraft carrier or the F-35, et cetera, et cetera.

And there's a lot to be proud of and to admit that that's -- there's a lot to that. I'm not the person who thinks that they don't matter. They do matter. They're reputable competitors. We've competed with them for decades. They do a lot of good for our defense industry and our military and our allies. And you can't just underestimate that. However, there is also a new vector, a new set of qualifications and attributes that are becoming more important.

And that's related to innovation, agility, commerciality, being able to pivot and go at the speed that the U.S. DoD and our allies would like us. And that's what a lot of the VC-backed startups and Silicon Valley tech companies pride themselves on, okay? The message that I want to give you is that it's not either/or. You can't just be successful and good enough if you were either this or that. It's the combination of both that actually makes the best sense. Can you be successful with one or the other? Of course. You have a much, much higher chance of success and a much better position if you are great at both.

And really, that is exactly what AV is the definition of our name is, what AV's track record is and what the recipe of the company has been and how we've been executing in the last decade plus. And so I feel very fortunate because in my career, this is probably the second time in my entire career, the first time was in the commercial world that such an opportunity has emerged and we face. And we've worked really hard on this.

You'll see examples of that today. And we make sure that -- we'll make sure that you get -- we are able to communicate and demonstrate a lot of that to you today. My last slide is really related to the markets. How large are these markets and what are the size of this market? This is a new slide. We have not presented this slide before. It's because now with BlueHalo and old AeroVironment combined as one AV, we're now looking at very large markets and total addressable market sizes.

So for example, in our offensive systems, that's about a $10 billion-plus market growing at a very rapid pace. Those are things such as Red Dragon you see here and Switchblade and Freedom Eagle-1, which is another product line that we're investing in. On uncrewed systems, these are non-lethal drones that eventually could also become lethal, but most of their missions are ISR, intelligence, EW, SIGINT, et cetera. And products in that category are such as Puma and P550s and Ravens, et cetera. That's another $15-plus billion market in the sweet spot of the market are the smaller systems that are attritable, they're low cost. They can do a lot of organic ISR capabilities for smaller forces.

Ukraine is a perfect, perfect example of that. There's over 1,200 Puma's right now operating in Ukraine today. It represents a significant portion of the ISR capability of the entire country of Ukraine, but they're doing it with 1,200 or so Pumas, not with $50 million to $100 million F-16s or predators and reapers. And every time that they lose one of these, the economic equation works in favor of Ukraine because the missile used to destroy one of these or defeat one of these costs way more than the drone itself.

And so that category of low-cost, prolific large volumes of ISR with uncrewed systems, which is Group 1, 2, 3 is going to be a massive market over the next 5 years. Other systems such as defensive systems, counter UAS, which you're going to hear a lot about today and also our innovation engine, which is MacCready Works and our advanced innovation within BlueHalo is also key markets we're playing in that is very large. You're going to hear a lot about that today as well.

So overall, we're looking at about a $70 billion to $75 billion plus market TAM, honestly. And we can debate whether it's 65 or 85 or 70, but it's massively large compared to where we are as a company in size and where the market is headed. And these are also the areas that there's a lot of investments and growth and spending from not only U.S. but all of our allies.

Last slide I will share with you is U.S. DoD and our allies priorities. If you look at the list and look at what we do and what things are we the leader in, it's almost like almost a perfect match. There's a few extra ones that the U.S. DoD is focused on other than this, but not too many more, okay? Precision Fires and loitering munition. There's products like Red Dragon and Switchblade or FE1, okay? Autonomous UAS. I mean you hear that every day from the Secretary of Defense, from the DepSecDef in every ally in the world and every country in the world essentially.

Counter-UAS, I don't have to explain that to you, and you're going to hear a lot more about that today. Space technology, cybersecurity and advanced ammunition. So I mean, these are the things that we have purposely deliberately invested in as a company and we built our portfolio around. And so I think we're positioned. The key message here is given the backdrop of the markets, investments, the shift in the defense strategy and mindsets and given the priorities and focus areas of spend, we're positioned incredibly, incredibly well.

I've been with the company for 15 years. We've had a lot of great years, but I genuinely believe that the better years are ahead of us. AV has never been positioned so well before to take advantage of this opportunity. A, they're large; B, there's a lot of focus on them; C, we're leading in these categories; and D, we're ready to scale and produce in volume. You'll see examples of it today, okay? So that's really what I've got.

One of our very old investor -- old many long-term investors asked me a question last night. It was a very good question actually. It's a question that I asked myself a lot. And it was "Wahid, what are you most excited about?" So this is all great, and I'll give you the top 10 list. I had 7 last night, but it's actually top 10 that I looked at my notes. loitering munitions, the Switchblade family, one-way attack, the Red Dragon family. These are $1 billion franchises. Easily $1 billion franchises each. It should be. Shame on us if it didn't become that, literally.

Our small UAS P550, the next-generation Group II UAS, the U.S. Army's program record alone is about $1 billion. That should be a $1 billion franchise just like the Ravens and the Puma. Our JUMP 20 medium UAS Group 3 UAS is a very, very critical sweet spot. We have the relevant platform that is performing and it's in the fight and we produce it and it's outperforming everything that's in the market. And it does missions that cost 10x more with larger platforms today, today. That should be $0.5 billion to $1 billion franchise for the company.

Freedom Eagle-1, it's early. We got -- you saw the down select that we were 1 of the 2 that were down selected for the next-generation kinetic counter-UAS missile for Group 3 and [ P+ ]. That is a $1 billion franchise as we execute and progress through the development process.

The next 18 months is critical. You're going to hear a lot about our RF counter UAS systems, radio frequency. These are our Titan and Titan-SV and Titan 4 products. We're our fourth-generation product. We're not making the first prototypes. We've delivered systems that's in the fight today in multiple continents, not just in the U.S. We're the leader in that. And you're going to hear some of that as well. Directed Energy solutions based on laser, which is a very big focus of today, and you're going to see some of that examples later today in the demo of it. We are on the cusp of that market taking off just like Switchblade was about 4 or 5 years ago. I expect that market to grow dramatically.

SCAR and our BADGER space comms is really key. That's a $1 billion franchise. And the last 2, I would say, is laser communications. You're going to hear a lot about that, one program that we just won. And lastly, I would highlight the AV_Halo, our software suite of products.

We've been in the software business for a long time, okay? We always use the terminology, software-defined hardware. What's happening is that the market is shifting, the customers are realizing they have to be able to buy software on its own. They're still not figured it out yet, our defense customers and our allies. But that will be a big piece.

So we're going to start the next section with our Chief Technology Officer, Scott Bowman, who has an incredible background. This gentleman has been with us for about a decade. He has bachelors and masters in electrical and mechanical engineering. He's been in over 20 different patents that he's authored or co-authored with other inventors.

And really is the brains behind the architecture of our AV_Halo software. And what we want to do is help you understand what this is because there is a tremendous amount of misinformation in the market as to what these pieces of software do for robotic systems and for the future of defense. And we're going to try to break it down for you as simple as we possibly can of what is it that we offer, why do we believe that this is important to integrating all these things and adding autonomy and AI to all these platforms and how that's going to deliver a lot of value to our customers.

And so with that, I want to turn it over to Scott, so he can walk you through that.

All right. We got comms. We're really good at that, by the way. So we're good to hear on stage as well. I'm a walker and a talker, so I'm probably going to cruise on both sides of the stage here. I will start off by saying thank you, Wahid, heck of a presentation and setting the stage for what I'm going to talk to you next, which is about AV_Halo.

Giving some background here, I took the job about 5 months ago, exciting time for me in my personal life, my professional life, but also because we were being merged with BlueHalo at that time. Super excited to come in, seeing the marriage of capabilities, the way that on the surface, they may not seem like they work together. On the surface, they may seem like they're not complementary. But once you dug in, you really start to think about how we fight. These systems are tremendously complementary to each other. And then I dug into the software and it was even more excited to see the marriage of the 2 companies coming together to provide a new software platform, as we announced a few weeks ago called AV_Halo.

And what is AV_Halo? Like I said, it is a software platform that is founded on existing capabilities, right? We're not -- certainly, we're writing new software, but we're really underpinning it with existing software capabilities that we're deploying today. And the entire platform underpinned by the 5 key tenets that you see over here to the left. We want to make sure it's extensive, modular, open architecture, Built for edge dominance, and that's a big one. I get a lot of questions. I see C2 over here, what does that mean? And there's lots of people talking about C2, but we're highly focused on the edge and owning the edge as everything we do here today needs to work better like at that fight. And so this platform will allow us to get after that.

And then finally, create this unified war fighting ecosystem. So again, taking all these and taking a survey across the company here over the last 5 months, piecing together these core pieces, finding the right interfaces to allow these things to start working together very quickly rather than measured in months rather than years to then be able to connect together all these systems that we just talked about in his top 10.

Because this architecture is predicated on very mature technology, we find ourselves being able to control the entire fight. Control the entire mission from detect all the way through delivery. Probably one of the 2 most important parts of this ecosystem is that we're going in head first from an engineering top-down approach that we wanted to be modular and open architecture and interoperable, not only to be able to horizontally integrate our capabilities, but also vertically integrate them and include additional third-party capabilities that may need to round out certain effects, certain capabilities and being able to bring that into a unified warfighter ecosystem into this kind of common world model that we know where everything is and we can cause effect within our own systems and some of the others that we've adapted.

I want to take a little time and drill down on 1 of the 7 services. So we have AV_Halo is a software platform. There are 7 services. The first one that we'll look at here is AV_Halo Command to kind of do a little bit of a deep dive here.

What makes up Halo Command is a big part of that is our, we'll call back-end software. I'll try not to get too nerdy on you guys here. my engineering degrees are coming through, I can tell. But anyways, the core of the software allows us to adapt, which we've already done today in shipping hundreds and thousands of today through this core software that's pulling in our unmanned systems and now starting to pull on our counter-UAS systems and all the other systems that have been brought in from BlueHalo and allowing those systems to not only feed our 2 mission and tactical UIs, which we're going to talk a little bit about and how those kind of interact, but also feeding out into the broader C2 systems, Lattice, TAC and other BMSs. There's FAAD C2, JADC2. There's all kinds of different systems out there that we want to be able to adapt to, but we want to hold that. What I would like to say is the brigade capability at Battalion and below. So that kind of forward operating base in forward, beyond the wire, that's our space.

On the mission UI side, that is kind of underpinned in our -- what was in Vision Halo. I think you'll see a little bit of that. Mary will talk about that, I think, in some of her slides later today, kind of underpinned in that technology where the -- and that is very much your kind of forward operating base that has an ability to kind of synthesize additional sensor systems and be able to and integrate with some of our counter-UAS systems and pass that data down to our tactical element, which has been built upon an acquisition that was done by AV a couple of years ago.

With the Tomahawk Robotics acquisition and Kinesis now is able to bring in that data and pass data back and forth and allow a scalable control paradigm from your mission UI down through your tactical system where end users can be very mobile and be able to continue to operate that system when you're in the last mile of the fight, if the mission system or other BMS C2s up echelon become disconnected, that tactical element, which is very important these days. I think we all know in the fight of Ukraine, as soon as you turn on an RF emitter, you're a target. So you got to be on the move, and this is extremely important to be able to allow us to operate our systems on the move like that.

So this is a busy chart. I get it. But what this is showing, first of all, is all 7 of the services, and I'll go through these each, but the ability to influence all of the different systems that we currently have in service as well as all the domains that we support. AV_Halo Cortex is our focus is on our intelligence engine and comes from a lot of the technology that we got with the BlueHalo acquisition. AV_Halo Command, we've already talked about. Halo Vision is more of our optical tracking aided target recognition business. We have a couple of different capabilities across both sides of the business and kind of consolidating that into a -- to drive more exclusive capability there. Instinct is our on-platform autonomy.

Again, we have that on both sides of the business and bringing those together to make this one more capable autonomous system, as Wahid talked about, that's certainly the future. Being able to get down range without having any kind of RF emissions whatsoever and doing it intelligently and striking effectively is the future. Instinct will be certainly a large area that we're continuing to put emphasis.

Mentor is another one. So Mentor is our synthetic testing and training environment, and I use that carefully because when I say testing, right, this whole thing is a software platform. There's a lot -- we have 40% of our engineering population is software engineers. In order to enable them and to drive efficiency in the way we develop, we need a test environment in order to go and test out some of these things before we put some of these systems down range and have issues, not that, that happens all the time, but every once in a while, it does. Mentor gives us an ability to have the synthetic test environment and test those things using that as well as since we can kind of train like we fight, this is how we test.

This also becomes a product with more capabilities for war gaming and training for our customers. AV_Halo to Tech describes the RF, EW and human factors type detection capabilities. That technology stack and some of these other ones here, and you'll hear some of that later today, are able to not just run in their current systems, but because of the modular nature of AV_Halo and the way we're pushing this new architecture, those software pieces can start to be run in different systems. Our EW capabilities that were once only confined to a box are now running up in our aircraft, okay? Aircraft goes down range. aircraft is now as a spectrum sensor and has EW capability all of a sudden because we have this software capability that resided down on the ground side and now able to move it up in the air.

Pinpoint, which I won't belabor too much, Mary has got some great talk points on this, so I'll leave that to her, is another very good example of our ability to physically point at objects at very large distances, long distances apart, but also being able to take that same piece of software and pull it all the way into our systems that might fly at 7,000 feet, and we want to accurately point something like that same software stack, that same capability is being pulled into both and driving efficiency and getting after faster delivery.

What you're seeing here is basically being able to take pieces of the platform and coupling those together to be focused on the particular product at hand, meaning we don't have to have all these pieces for things to work. In this case, this will describe Locust. We'll see that a little bit more. There's only certain pieces that you need, and that's fine.

Wahid mentioned before, because these are all not only interoperable themselves, but open architecture, we can sell at these layers as well. If we opt to go sell the software at those layers, we can do that as well. But you see here how these different pieces can interact with these other domains without requiring all the other pieces if the solution requires it.

So this is -- since our software is very tactically focused, we found it prudent to study how our customers think about the -- solve their decision cycle. So this is known as an OODA Loop, observe, orient, decide and act. And so when we were laying this out, we made sure that within our own capability set, we were able to close this loop with our own capabilities. And yes, we can integrate other third parties, and that's great, but we want to make sure that we can do it with all the systems within our own capability and do that very iteratively to outiterate the enemy.

In this particular use case -- in this particular example, you're seeing an SUAS, more of your traditional SUAS system that may fly out with the SIGINT payload kind of like I talked about before. He's able to locate something. Now you're able to kind of -- using command also put -- excuse me, through Cortex identify what that signal of interest may be and then -- and from there, be able to launch something like a Switchblade to kind of act upon it. So all of that can be now done within this AV_Halo ecosystem within the AV family of products.

And kind of last slide here to get off the stage, just kind of another view of how you take our software-driven hardware pulling it all together into a coupling software with the electromechanical pieces of it to create a system like Locust. So all of the Locust system is being run by our AV_Halo platform.

And I think for those that are able to make the tour today, you'll see that function today. And I'm not sure there's, I don't know, about 50 or so and being shipped today and more on the way.

So with that, I'd like to introduce Trace Stevenson, President of our Autonomous Systems division. Trace brings more than 20 years of experience in aerospace and defense and was most recently the segment leader for AV's Autonomous Systems segment. Trace is responsible for all operations with Precision Strike and Counter-UAS, Uncrewed Systems and MacCready Works. Trace?

Thank you, Scott. Appreciate it. And very excited to be here. Good morning, everyone. It was a pleasure to meet and discuss with a lot of you last night. For those that didn't make it last night, hopefully, we'll have a time to chat today. I did see some new faces come in this morning. So anyway, welcome.

As Scott mentioned, very excited about AV_Halo. It's really messaging to you all the capabilities that we've been developing for many years, right, combined with the BlueHalo team as well. So as you mentioned, this is continued investment, but capabilities that already exist in our products today and really putting all those puzzle pieces together. So very excited on that.

I'll just quickly go over the new segment, Autonomous Systems, which I'm very excited to be part of. It's really broken into 3 groups. First group is Precision Strike and Defensive Systems. So that's made up of our family of loitering munitions, so Switchblade 300, Switchblade 600, Red Dragon and from the BlueHalo side, our counter-UAS, as Wahid mentioned, we're on our fourth generation of Titan. So the RF piece of counter-UAS falls within my segment. The Directed Energy piece falls within Trip's segment, and that's really because that's focused on space as well with the lasers. And so it made sense to position that within Trip's segment, but the collaboration is ongoing between the segments to ensure that we are the leader in counter-UAS going forward.

Also, that consists of our electronic warfare. I'll show some of the products on the next chart, so you can give you an idea of what that is. And then our legacy on Uncrewed Systems, which I previously ran that segment, which now is underwater with the BlueHalo combination, we brought on a company in Postown, Pennsylvania that's focused on EOD type missions underwater, our ground robots, which is Stutkart, Germany, which is EOD missions on the ground. And then our legacy SUAS and our medium UAS JUMP 20 variants.

On the MacCready side, really, that's focused on what's our next disruptive technology, right? How do we make sure that we're leading in the space 5 years now? How do we disrupt ourselves, right? We're constantly trying to figure out how to disrupt ourselves and disrupt the enemy and the adversaries that we're seeing and the data that we're getting back from theater real time on a daily basis.

Pro forma for FY '25, just north of $1 billion. and had a great first quarter at $285 million. And again, as Wahid said before, talked about scalability and production. We're the only company that can say that we've delivered 42,000 platforms to date in this space. So the numbers are massive, and we hope to see those continue -- we expect those to continue to grow and scale even more rapidly.

So just an overview of the product portfolio within the segment. And I'm proud to say that I don't know of any company that exists today other than AV that has a portfolio this large that addresses the key areas that Wahid mentioned that our Department of War is focused on and our allies are focused on. We are well positioned. And these are all products in production today. They're not prototypes. They're in production, and we're scaling in the areas to meet the demand for our customers and war fighters. And starting on the bottom is our -- again, RF counter UAS, the Titan IV.

Wahid mentioned Freedom Eagle-1. We were down selected as 1, not 2 vendor. So we are the sole winner of the next-generation counter UAS missile. It's a gap that the military has today. They have to use very expensive missiles to shoot down Group 3s in ranges that they don't have capability today. And we competed against all the bigs and have won that program. It's a multibillion-dollar program. And it's really -- they're looking for somebody different, as Wahid said in his chart, that kind of meets that middle of the curve, right?

C2 tracking and sensing, we talked about that. Scott talked about that electronic warfare. So we don't have any of those products here today. So you should be happy, your cell phones are safe. We're not stealing any of your text messages. But if you were in their facility, I would not take your cell phone inside. So you can imagine they're focused on targeted information through WiFi, through satellite, through all different means of communication to get our customers the information they need on specific target sets. Our UGVs, as I mentioned before, primarily EOD missions, MacCready works, again, next-generation products. Those will feed the other groups across the company going forward

Our new uncrewed underwater Maritime, all our UAS systems. So significant number of UAS systems and more in development today. As P550 has launched and Wahid mentioned, we were -- we have been awarded contracts against the Army Long-Range Reconnaissance program of record, which is $1 billion-plus program. Our family of loitering munitions and one-way attack. And as Wahid mentioned, our Red Dragon that we launched in June at SOF WEEK and then our Group 3. And the most recent variant of that is the Jump20-X, which is really focused on maritime capability, both land and maritime. So the X stands for cross domain.

This is kind of OV1. The thesis that we've had for years now is multi-robot -- several different layers of robotic systems working together to perform missions that not one of them can perform on their own. And so we are changing the way the defense looks at how they -- how these systems perform missions. And so you can see you've got UUVs, UAVs, HAPs, Switchblades, counter UAS, all working together on the battlefield to enable our war fighter to be successful in the missions that they need to do in a peer-on-peer environment.

Manufacturing. We always hear a lot even from our customers, how much can you scale? Can you meet the demand? And the answer is yes. We're well positioned to scale double, triple, quadruple, quintuple in various product lines. And we are actually doing that in some of them today. We're leaning forward. We raised money so that we can invest properly to meet the demand of our customers in advance so that we are ready when they need the product, and we are at scale.

And so we're looking at all these products working with our customers to determine how much we need to scale, how much we needed to invest, where we need to invest and where we need to scale. So you can see within the next 12 months, we have the capability to scale rapidly on various product lines within the portfolio. And we are located in multiple sites. You can see some of our manufacturing facilities there, but well positioned to have distributed manufacturing across the U.S. and in Europe.

So major programs that we're going after. We are enabled by our innovative solutions where we invested the products we have available today. Our manufacturing capability to meet the demand and in major programs of record that the U.S. military has right in front of us that we are well positioned to capture or are in the process of capturing. We mentioned long-range reconnaissance. You've seen multiple awards that we've announced on that. The U.S. Marine Corps OPF, which is a Switchblade program of record, for the Marine Corps massive program, the U.S. Army Lasso, which is also a program of record that we are competing on with Switchblade. And then as we mentioned in our next-generation counter U.S. missile called Freedom Eagle-1, which we -- we were the sole down selected winner of that.

And as Wahid mentioned before, the TAM, the TAM is massive. We're in a great position, we've invested in the right areas, and he said it's a perfect time for AV, where all the stars are lining up. We created the Switchblade market, massive market now. If you go to the defense shows, you'll see loitering munitions almost in every stand. We're the market leader, and we are -- and we've been in this market for years ahead of the competition.

On our defensive systems, again, TITAN 4, 4th generation, right? We've been delivering. We've been incorporating AI autonomy and all the new software capabilities in the next-generation products to maintain our leading position in the market. Uncrewed systems, again, another market that we created, back in the '80s with the pointer. So we are in 55-plus countries with our uncrewed systems. I'd like to say we have an unfair advantage. We have feedback from our customers on a daily basis of where they want to go. And with the capital that we have available to invest, we're able to maintain that leading position.

And then our MacCready Works, which is huge opportunities, looking at 4 or 5 years ahead of us, and they will generate disruptive products that will compete with us to keep us honest and ahead of our competition and maintain our position, which is really providing the best of the best for the war fighter.

Okay. With that, I will introduce my partner, Trip Ferguson, it's a pleasure to work with him. He was the prior COO of BlueHalo. He's a veteran of the United States Marine Corps, so I'd like to thank him for his service. He actually flew Ravens in Fallujah. So he's known AV for a long time, and it's really an honor for me to partner with him. He lives -- he's got an economics degree and an MBA and it currently resides in Huntsville, Alabama. But again, it's been a great opportunity to spend time with them, and I really appreciate the partnership that we have together. So thank you, Trip.

Thanks, Trace. Awesome. Good morning, everyone. Welcome to Albuquerque. This is a huge moment for me personally. I think Mary shares the same. The team here in Albuquerque has worked so hard for years to reach a moment like today. And so you being here means everything to us.

As I think about where we're going. I really want to start about why we do what we do. I get asked all the time, normally in virtual calls and not in person like what's the secret sauce? What happened? How have you been successful? And it truly does start with our people and our focus on mission. We tell everyone, we don't make toasters. We don't sell insurance. Both are vitally important. But what we do is really, really important. And I live that experience.

A little part of -- a little bit more of the story that Trace didn't share. In 2006, I was part of the evacuation of Lebanon. During the Israeli-Hezbollah conflict. And when I came back from that deployment, they actually sent me to a little company called AeroVironment. And I got to visit with some folks. And it's just fascinating to see where we've come. And it is proven, it is combat worthy.

So my part of kind of informing you is to prepare you for what Mary is going to share. Mary is going to talk about a ton of technical marvels that you're going to see today. But let me just start with what is in the organization that I'm responsible for, who are my key partners and what does that mean? And where is it going?

So start with Mary Clum, who's sitting here today. She is responsible for our space and Directed Energy Mission Systems organization, primarily focused here in Albuquerque, but she also has locations across the country. Jonathan Jones runs our Cyber and Mission Solutions organization.

A lot of folks say, hey, Trip, do you all do services? And I go, not really. We provide technical solutions, solve really hard problems for our customers. We develop exquisite systems, specifically within the cyber world, think IC as well as for folks like the Air Force Research Lab. We are doing cutting-edge work. And I can't wait in the upcoming months to share some of the neat things we're doing, I think you'll be really, really intrigued.

New addressable markets, we haven't had a chance to talk about. The team here in Albuquerque operates out of 3 buildings. The building you're in today is where we actually build our BADGER product for the SCAR program. You're going to be able to put your hands on an actual BADGER today. So that will really help you understand what we've been talking about, what is the maturity what is the technical risk. We're going to solve that for you today.

And the building in between us and the main road in the middle is our Space Technologies facility. Think of things like our recent announcement of laser com. You're actually going to get to go into the lab and see what a laser com terminal looks like and what it means. And you're actually going to get to meet the engineers who develop that. And then we're going to go to our Directed Energy facility, and you're going to see where we integrate and what that means. And then for those, hopefully, you're coming with me, we'll get a great afternoon in the desert. Someone's going to get to go in a Stryker and actually push the button and take down a drone. So I don't know who wants to do that. There's been a couple of takers already. We can trade bourbon for that later.

But it's awesome. And I guess the key takeaway, this isn't a PowerPoint slide anymore. This isn't a dream. This is a reality and it's combat proven. And we now are becoming a leader, and we have a right to win. And hopefully, you leave today understanding that. A couple of more key takeaways. Our team is deep with talent and experience, decades of expertise. We are loaded with clearances, which give us access, which is very important as we look at new addressable markets when you think about things that aren't in the normal budget, okay? And then we have a lot of PhDs. We have brilliant team members. But most importantly, AV nation and what happens here, like we have the right mindset, everyone here wants to hug a cactus every day. They're all in. They want to do great things. And I've ever been a faith and Mary's team and the folks are going to talk to you. So I'm really humbled and thankful to be here.

When you think about our products, we talk a lot about all these different things in the space domain, right, Directed Energy. I just want to take a minute and talk about what is in Cyber and Mission Solutions and specifically why that's important. So very few companies have access to customers. Very few companies have the ability to listen. Our leaders that are on site, whether at Kirtland Air Force Base, Wright-Patt, running the watch floor for [ Arsent at Shell Air Force Base ]. They hear things and they learn things. We are very well connected with our customers. That allows a faster feedback loop and allows us to answer their biggest problems. And I just want you to leave with that. And if you have questions today, please come ask me about that, but we really operate on the high end.

I'm really excited about growth in the IC. We're starting to see some things really come back post [ OS ] which is very exciting. And we are uniquely positioned through certain contract vehicles to be a very high value when you think left of launch in Golden Dome. So I personally am excited about that. When you think about our OV1 you can almost close your eyes and think about Golden Dome. And when I think about that, we are uniquely positioned for backhaul communications, which will be critical for anything we do in the next major conflict. What happens left to launch. We are uniquely positioned, and Wahid has already shared about our partnership with SNC, how we think about the near fight, the ability to field products to protect critical bases and infrastructure.

I'll talk more about it, but whether it's with our directed energy products, it's with our Titan products, it's with Freedom Eagle, our ability to understand the need, resource that need and deliver is really unparalleled right now. And I would love to be able to kind of talk more about some of those on our tour today.

I am really excited about our access within Cyber and Mission Solutions. I wish everyone in this room had clearances and we were in a secure room. Because I could tell you so much more. But I really feel like we are making a difference. And I have 3 kids. I want them to continue to have the American dream like I've had and it's essential that those areas are successful, and we are doing very important things.

When you think about our footprint, we believe in a decentralized footprint aligned to customers provides agility and the ability to deliver. Others do not. What I can tell you is that our customers have access to our facilities and our leaders on a daily basis. What does that really mean? That allows you to have decision velocity. It's one of our core values and what does that mean? You can have speed with direction.

We're not waiting and sending e-mails. We get the good news and the bad news together, and we're able to make decisions. But when you look at the footprint, you can see we're nationwide now, we are facilitized and we use the mantra of being prepared. We were always preparing to be busier, and we've already done that. So we're prepared for the growth to come.

When you think of SNC, why did we do that? There are very few companies that have the mindset of AV and SNC is very uniquely qualified to meet the speed at which we make decisions. I would say they also have complementary products and services. Together, we can have a near-term offering that is meaningful and available today. And that's a key takeaway, I think everyone should leave with. And we have a blueprint that is available that says exactly what we can do and exactly we can provide, and we actually have the funds to go do those things. And I'm really excited about that.

So I don't know who all in here has heard me speak before on some of these online calls, virtual calls, but I've tried to give some data points of what I thought would happen in the first 90 days. And a lot of folks have had just a lot of questions of like, hey, will the heritage BlueHalo team pull through. And I feel really confident today to say that we are. We've seen that with recent awards. We've seen that with additional BADGERS. We're seeing that with large advanced solutions contracts that are flowing through.

I'd always try to talk about laser comm and how excited I am and what that means. It is landmark. It is very exciting. And we're going to show you today why we believe it's so exciting and why we believe it is the future. Because when you think of Golden Dome and what happens the 15 minutes before the next major conflict, you're going to have to communicate with large bandwidth across long distances, right, in a very unique environment when everything else is jammed and this capability is there.

And then today, we'll decide who gets to push the button, but having a limitless magazine with the directed energy weapon system is so important, right? It is not affordable to continue to shoot high-priced interceptors at relatively low-cost drones. The math never works. And when you see this capability and you understand it, it's an aha moment.

This is going from the flip phone to an iPhone, right? Like the iPhone 17 Pro. It is totally different. It gives you so many options. And what makes our team unique is our system works. It's been for deployed. But most importantly, it is modular and it is ruggedized. And so we're going to walk you through the key control points, but we're well prepared to serve both the lower kilowatt range, which is very affordable as well as scale up into the 150-kilowatt and higher if needed. I think the math will take our customers where they need to go, right, based off the total layered approach, but we are the most prepared company on the planet to provide directed energy capability today, and you're going to see it firsthand.

So I just want to say thank you again. One of my key partners in life is Mary. And I just want to give you a little bit of background on her and why she is wonderful. Mary brings a unique skill set that has positioned this team for success. Mary was a small business owner. She's actually sold a business. She's running ESOP, She's also run mid- and large companies in the defense industry.

Mary was named Space executive of Washington Zach last December. But she is a great people leader. I think you averaged about 3% attrition here in Albuquerque. So the data supports everything I'm saying. But you will not find anyone on the planet that cares more about what we do and why we do it. and there's no one more qualified to run our organization than Mary. So Mary, welcome.

Thank you, Trip. All right. Well, thanks, Trip. Before we get started and dive into the 4 product lines of Space and Directed Energy. I want to start with our legacy.

So our legacy started back in the late 1970s. When we invented the sensor, it's called the Angular Rate Sensor or ARS1. It was designed to measure jitter from space. But think about that as the 1970s, how many satellites were in orbit at that time. Anybody? Only 10 to 15 satellites on orbit, we were already building space qualified technology.

So today, the U.S. military flies hundreds of these satellites. And at AV, we're still building this Angular Rate Sensor. We're on Variant 16. As you can see here, it's smaller. It's actually more powerful and the same customers from the 1970s are still coming back to us. In addition, customers from other military, national security, civil, commercial and international markets are buying this sensor and why I could measure up 40 nano radians of jitter. What is 40 nano radians of jitter? Well, I need your help to answer that question. So in the audience, raise your hand if you like data and analytics.

Okay. I thought that was loaded. This side is paying more attention because I figured all of you would like data analytics. How many people like to travel and you'd like adventure? Okay. Right here. What's your name? Tyler, where are you from? New York. Tyler from New York. Well, Tyler, you said you liked adventure, you're going to help me today. Congratulations. You've been promoted, you're an astronaut. Are you ready? You're an astronaut and you're going to go to the international space station. It's only a 460-kilometer flight but don't worry, you're not a test engineer. This isn't one of those flights. Remember, we've been building this sensor for over 40 years. And you went to the International Space Station and you know you have a lot of your time on your hands up there sometimes.

And Tyler, you were a little nodding. You snuck in your phone with a selfie stick. And on the International Association, you remembered, oh, the Angular Rate Sensor is there. And you put that on your selfie stick and your phone because as you were board, you're sitting by the window, we've all seen that picture, right, from the International Space Station of Earth. And Tyler was like, I've got to have that selfie with earth behind me. But for 40 nano radians of jitter about pointing accuracy. Now bear with me, because I don't know how many people have the iPhone 40 yet. The limiting factor in this story is the optics aren't there, but our jitter control is. So Tyler, you have this Angular Rate Sensor on your selfie stick and the phone. And we all know AV is an autonomy company.

So the angular rate sensor will autonomously position the phone you've decided you want to take the picture, white when you're going over your house, your apartment in New York City. And it autonomously goes -- how do you pose for selfie? Because my kids say, I don't know how to do it. Okay. So here's Tyler, who's posing. It turns on a green light autonomously. It takes my picture, click. Okay, Tyler, you got that picture. And in the back, 40 nano radians of jitter, you -- what do you do when you take a selfie, you pull it up and you zoom in and say, do I look good. But right in the center of the picture, you realize, oh my gosh, that's my house. And what's that shiny dot right in the center. That shiny dot was actually a quarter you accidentally left on the roof at a party. You had that's 40 nano radian of jjitter that we can measure with an Angular Rate Sensor. From the international space station all the way to Tyler's rooftop balcony, he can see that quarter.

That's the power of our enabling technology and that enabling technology is so critical, customers from the 1970s are still coming back to us, and that's a competitive advantage that feeds 2 of our product lines. In fact, it feeds the space-grade electronics and directed energy product lines. And why is that significant? Well, Wahid presented the total addressable market over 5 years and just between those 2 product lines, that represents a $20 billion market.

So at AV, we very strategic about our growth. And we've moved from these components up to payloads like the laser communication terminal shown right here, all the way to large mission systems. So I want to introduce you to the 4 product areas. On the very left is our BADGER. The BADGER is providing RF satcom for global satellite communications. The second area is Space Grade Electronics. This is power controls, command and data handling systems, fast steering mirrors and the laser communications.

The third area is our Panther product line. This provides telemetry tracking for missiles and hypersonics. And on the very last is Locust. It's our product family of directed energy, where we build laser weapon systems. And although we don't have enough time today, you'll see at the very bottom, each one of these product lines are family of systems. And so at AV, we provide all domain dominance. Let me give you an example of how important that is.

Panther. I'm going to pick on Panther here, says at the bottom, we have a ground station, an airborne payload, a maritime station. Actually, right now, we're also working on a space-based payload. The importance of Panther is it provides telemetry for missiles and hypersonics. And I don't know about you, I've been thinking a lot about Golden Dome. And I have to ask, is the U.S. ready to test salvos and missiles and hypersonics more times a year than what I can count on my hand. No, we're not. That is the power of Panther and why we need to provide a distributed architecture that's proliferated with all of [indiscernible] domains, and it's the domains where the demand is accelerating.

So our legacy, it's all about [indiscernible]. Our people have provided over 260 systems on orbit. It's proven performance in the harshest environments. We've delivered laser weapon systems with over 23,000 operational hours. Those are real missions, not demos. And over 50% of our staff in Space and Directed Energy our software and specialty engineers. We are embedding adaptability and resilience in each system we build. Those fundamentals are in place with our deliberate growth based on our heritage our operational execution record and our talent density. AV has the foundation to grow with confidence.

So Trace and Trip talked about AV's expertise in manufacturing and building capacity, scaling is also embedded in everything we do. And it starts far before manufacturing. It's in our product planning, architecture, design and our expertise in delivering operational prototypes based on our heritage of execution. Wahid talked about that, the prototype versus production. 10% in the challenges in the prototype, 90% is production. He's shaking his head. I agree with you, Wahid.

Production is where the supply chain is tested. Tolerances are stretched and integrations are unforgiving. That's why we don't just design for performance. We design for scale, reliability and repeatability. We don't just meet the customer needs, we anticipate and deliver on their wants, building a long-term mission advantage. So let's talk about what does that really mean? And this is a real on-orbit example of this time.

On a recent mission, are -- we were for an imagery satellite. The mission was to deliver a fully autonomous sensor suite. We provided the payload, the image quality, it needed in low-earth orbit. The high quality of images meant the tactical mission was persistent battle space awareness. And the system reached Orbit and a partner's hardware sensor failed. That failed the customer need didn't it still gives me goosebumps today. That was not a good day. Traditionally, missions are lost, sunk cost over years of design and investments, but AV being autonomous, our autonomous architecture provided the mission needed and want it, and that was to succeed.

Our architecture allowed the customer to actually reprogram the sensor on orbit. And after it reprogrammed on orbit, it worked and images were received and it's still operating today. And today, on the demo on the tour of the facility, it's the facility right in the middle, you will see we are building that same autonomous sensor suite for proliferated low-earth orbit architecture. That's how we build resilience and adaptability in all our designs with game-changing technology.

And when Scott talked about AV_Halo, that's the power of AV_Halo. It's a unified autonomy and resilience layer. And AV_Halo has already been proven on orbit. So we're not just building concepts, but we're building operationally ready systems for today. The picture on the top that's one of these laser communication terminals. That is designed to move massive amounts of data securely across space.

On the bottom is our Directed Energy system. These are 4 systems that were built and delivered and operational in the theater already. We're scaling embedding discipline, not just the factory growth. we minimize costly errors. We anticipate mission needs, and we deliver resilience. That's from those on-orbit saves, laser communication networks, DE weapons and theater, we are ready to scale for all domain dominance.

So the threat landscape. I know you guys know these stories. I want to bring them a little bit to home in our AV home. The first one is the spiderweb concept, where the adversaries are deploying multi-domain asymmetric spiderweb, that spiderweb overlaps jamming, dazzling, laser effects, lethal effects, the problem. Our current systems in the military today, they're siloed, they're sequential makes defense and offensive systems vulnerable, an AV solution that we have that you'll see today, directed energy.

It affects in seconds. It's scalable. It's nonkinetic layer defense. It's where you need localized defense and offensive effects. So we've already proven it in the field, and we defeated drones and adapt it to multiple platform configurations. And so what does that mean? In an offensive situation, I'm on a mobile platform. I want to maneuver and you're going to move maneuver the laser communication -- the laser weapon.

And in an offense, you're going to have that be stationary fixed to protect the base. That's what we've done. We've completed all low rate production. We feel it. We've manufactured at scale. Now we're ready for that scaling. In fact, we're positioned for adoption as the foundational capability as laid out in the Army's 2030 plan. This is where the Army has planned their force design and directed energy is planned to be integral in military's laser defense system for counter-UAS.

The second example, Space Systems and how China has been doing orbital maneuvers. This was reported in July of this year. Chinese satellites were conducting close proximity operations. So they were flying very close together like an Infinity symbol. What does that really mean? What was that threat? It blurs a little bit line between peaceful and hostile and it's driving new requirements for us right now. It's driving the need for protective layers to include resilient communications.

The solution, you need AV's laser communication and optical payload high-precision pointing, resilient, secure links and it provides situational awareness. We have already fielded modules built for harsh environments. We know those. Those are environments like really tough radiation, thermal stability control. And we have the capability right here in our facilities to provide not only the functional but the environmental rigor these threats impose. So it's our heritage and the readiness. It means we're ready to scale for contested space.

So our growth envelope. We do this over 5 years. We conduct long-range planning. We're doing that right now. And our total addressable market in Space and Directed Energy is across 4 main product lines. We're very confident as it's grounded in the heritage and our programs of record backlog and those urgent mission needs. So laser communications, let's start with this unit right here. It has a very high 24% CAGR and like that. Why? Because we're at the inflection point where this is needed. That's why that threat is there. And we've just announced our new program earlier this month. It's a program award totaling $240 million over 3.5 years. That's a strong program with a strong requirement for a follow-on. This system, again, enables those large data sets to transfer at scale. Directed Energy, the next line, with an 8% CAGR, it's proven in the field. Successful live threats have been defeated and we're transitioning to scaled manufacturing. We offer this modular architecture you're going to see today, and it's on any platform. You pick a platform, we'll put it on that platform.

The Army is asking us today how many more can you build and we're ready to answer that. RF satcom and has a 7% CAGR. This provides worldwide global coverage. It's strong multiyear backlog is $1.7 billion, say that some visibility through long-term contracts. Space electronics and sensors back to our legacy, I'm going to bring back the 1970s, we're going to make this into shirts. This is our core avionics, our power systems and sensors for space missions. This is really embedded in all the current and next-generation constellations with a really broad customer base, the largest TAM at $13 billion and a 9% CAGR over 5 years. Those are 4 domains with heritage, customer intimacy and proven technology, a backlog visibility that supports our near-term certainty and a 5-year growth that drives long term stability across a family of systems.

So let's start with our first technology you're going to see in Albuquerque, our BADGER. Here's an example of BADGER right here. We're going to highlight a program win. That's the Satellite Control Augmentation Resource program, or SCAR. It's an awarded value of $1.7 billion, extending all the way through '23 -- 2030.

And right now, you can see the current challenge. You can see that on the top right of the screen. Traditionally, RF communication is one traditional parabolic dish talking to one satellite. That's what we currently are -- how we're operating and talking to over hundreds of satellites. That current system only has about a 75% utilization. Do you know what that means when a critical technology only has 75% utilization, it means that missions are skipped, maintenance is often deferred, and it's a real bottleneck. To me, that's risk. Our SCAR solution actually changes all of that. And it's in very high demand with the space force. And why is that? Because you all know satellites have been launching, and it's been tripling every year since 2012.

But at the heart of our SCAR solution is the BADGER. That one BADGER, it's built on AV's IP. They're Phase array tiles that we call multi-band software antennas. They are actually 160 antennas in one of those BADGERS that covers the entire geosecreness orbit. You can see that right here, this first unit configuration. But what's really neat about BADGER is it's very flexible.

So you can change that configuration. Can you see that second example where it's in a circle, that's covering over 200 contacts in LEO and MEO. So what does that really mean? This system is not only reconfigurable with the same hardware. You just need a forklift to move that. It's transportable. So you surge where it's needed and its resilience in contested environments. But what makes me really proud of winning SCAR was that we beat every large prime.

But what set us apart -- it's what Wahid he told you. It was not size. It's the way we work. We put our entire team shoulder to shoulder with the customer. We listen, we adapt and we designed with them. So SCAR's a program locked in, in a very high barrier to entry market. but our team did it. And what's our customer saying, I'm going to quote him. And I want to pause on this a little bit because it emphasizes that demand and urgency that the space force has.

So in June of 2025, Breaking defense quoted Dr. Kelly Hammett, he's the Director of the Space Force Rapid Capabilities Office. He said, and I'm going to read his quote. We're going to need a bunch of SCARs, and we're going to need them fast as we can make them. So what's AV's edge? BADGER and our AV_Halo is software defined.

So that means it's scalable role and it's very modular architecture can have multiple satellite links from 1:1 to 1 to 1 to many satellites. And that's orbit flexibility. We can 12 units cover geo, redeploy one of those units and you can cover up to 200 contacts in LEO and MEO, where you need surge capacity because we hear this quite a bit, what area needs search capacity the military can move that to an area, and it's flexible. It's transportable and mission resilience.

So one of these BADGERS again, has 160 of our AV phased array antennas but to keep full mission capability. When it's compromised and one antenna goes down and has an issue, the whole system will not go down. I'm excited. We're ready to scale. You're going to see this. Our whole facility is outfitted with full test automation and the manufacturing is underway in the first deliveries this year. So the customer is asking for more. We're ready to build more. But rather than making me describe it, let's see BADGER in action.

Leading the business unit and driving the SCAR program is Michael Pace, our General Manager for the product line. Michael and his team have been at the center of this win. We're going to queue up a short video, and that's going to highlight our capabilities of the system. And I want to welcome you all to Michael. Michael?

Good morning. Thank you, Mary. I appreciate it. So I am so excited to have you guys in our facility today in just a few minutes. We're going to be able to go on a tour and show you some of this hardware. I want to correct one thing real quick. This is a fourth scale BADGER. So full BADGER is 4x the size of this, you're going to see it in the high base. So before you guys ask that question on the tour, I wanted to clarify that. Let's talk really, really quick about what is the status of this program? Where is the technology? Where do we stand overall for technical risk? So if we go to the first little slide on here, you're going to see how we recorded a demonstration using our test hardware that you're going to see on the tour. We did this about 2 weeks ago.

And when we did this demonstration, this has all of our beam forming technology, and it's really solving that problem of you have one ground site and you've got one satellite. We can't do that anymore. So if you look at this picture, this was using our scheduler. This is showing all of the active satellite passes that we had available to us over a 4-hour period during this demonstration. So all of these lines represent having to have your own dish on the ground in order to talk to that specific satellite. During the demonstration, we're going to show you guys acquisition and tracking, and we're going to do that for two active beams, which would simulate two satellites coming down. The system when we demonstrated this was capable of 12, but we're going to show you an example of two. So this is live hardware as we hit play on the video. The first thing we're going to do is acquisition. And as soon as this starts to go, what you're going to see is a couple of different things.

First of all, you're going to see 2 diamonds on the screen. These 2 diamonds represent our 2 targets of what we want to track down to the bottom, you see our downlink spectrum. So this is a signal that's coming from the satellite. This is a live demo outside for a geostationary satellite, and we're going to start by actually telling the system to go ahead and acquire. We come in, we click on it, we say acquire the system immediately within 2 seconds, finds the satellite in space. We don't know where it is, and we start our track. So you see that diamond on the target. Our spectrum goes up, as you would expect because you're seeing the downlink come down. We're going to do the second thing for the second beam. Now we're tracking in both of those. Now we're going to quickly show you guys, well, that's good to acquire, but what about if this target is moving, what does that look like? So what we're going to do is we're going to actually move our base. You'll see the spectrum on the downlink stay consistent but you'll see our targets moving around.

So this is showing that we're closing a full tracking loop for these satellites. Again, this is a geostationary satellite. We're showing 2 beams of operation. And the big point here, like why this matters is, we are getting through all the technology development that we need in order to finish the base tile. This is actually a live beam forming tile that you're going to see on the tour. And that scales very well as we go from 1 tile to 9 tiles to 160 tiles to thousands of tiles that we have on this overall effort. So if you go back to the slide deck, I'm going to jump back into that real quick. I'm really highlighting Phase 1 is all about technology development. Let's get the first 1 field and get it out into the field and get it operationally accepted by the Space Force. Mary is now going to talk a little bit about Phase 2 and Phase 3, which is all about global operations. And then as Scott talked about earlier, Phase 3 is all about taking that software stacked AV_Halo, integrating these different personalities into the system, so we can enable future system modes, not just for this customer, but for all of our AV customers.

So Mary, the floor is yours to talk about the rest of this. So thank you.

Thank you, Michael. Thank you for the incredible work from you and your team. And as we look ahead, Michael said, the SCAR road map doesn't just start with hardware because it's software defined. So next, we're scaling for global operations and BADGER antennas are built to evolve with the mission. That means as time passes, we don't have to replace the hardware. We extended its role with software upgrades. Today, we're already investing and what Michael did say is called personalities. Those are next-generation enhancements that allow the antenna to take on additional mission profiles, all through the software. That's how we future-proof the system, hardware delivered by 2030 and innovation that keeps adding capability well beyond scaling with demand and growing with the mission need. So we've talked about communications in the RF spectrum. We're going to move to optical communications with our family of space technology products. This is where our decades of space heritage shine from on-orbit sensors to fast steering mirrors to control electronics, all the way to integrated laser communication payloads.

Our mission-critical with over a dozen different customers across both government and industry partners. A simple example of our criticality, the GPS your phone uses or the weather satellite. Did you guys check the weather every morning? I'm one of those people. Those are both enabled with technology like our control electronics, powering the satellites. We do that through autonomous control electronics and command and data handling satellites. So we have to ensure flawless operations. How do you do that? We run these through millions of lines of code, simulation and testing. If you can believe it, we do that all before it's entered environmental testing. Environmental testing, what does that mean? Vibration, shock and full thermal vacuum chamber checkout. That's actually all done here in our facilities. You're going to see that. And it's the level of trust that customers place in us because we're providing the brains and nervous system of these satellites. That means you have to have redundant capability. It can't fail. Failure is not an option in our missions. So one of our missions, we're going to talk about that.

I mentioned we had 260 systems on Orbit. And one of those missions is the NASA Laser Communication Relay Demonstration or it's called LCRD. It included a terminal that was installed on the International Space Station, ILLUMA-T. The mission was providing high data optical relay. We are actually going from LEO to GEO all the way to ground with NASA. Our role, we provided the gimbals, the pointing, the control electronics. Those were the foundation of the mission, the precision laser links and the terminal, it must continually point to that narrow laser beam across distances under the harshest environments. That's thermal, vibrational and orbital motion constraints. And this heritage, why is it so important? It enabled our new $240 million laser communication award. It's proof that our legacy isn't just a history. It's directly fueling the next wave of growth in laser communications. But why was this award so critical, because the foundation of how we built our system for relay communication, it operates over 200,000 kilometers.

That's multiple orbits. So that's the design that AV invested in, and it expands not only from LEO but for MEO, GEO, 200,000 kilometers, you can go look at it goes beyond GEO. And so that's not just limited to LEO like many of our competitors. In fact, earlier this year, in March, the Government Accountability Office, or GAO, published an article. It was calling on the DOW to instill a hybrid multi-orbit satellite communications. Why? We need to avoid fragility, bottlenecks and vulnerability in our communications for the future. And we also have to address the rising data demands. ISR platforms, they take millions of images a year, don't they? Missile defense systems, they need real-time secure links, and our system provides that resilient and secure backbone to support all of these mission-critical architectures. In fact, this laser communication system from our heritage and that deliberate strategy to go from components to payloads, it's vertically integrated with all the critical technologies.

That would be fast steering mirrors to improve the image, a control architecture that's autonomous and AV_Halo with high technology heritage. This enables us to move fast when we're vertically integrated to address the new needs. In fact, the design directly supports Golden Dome requirements. That's survivability under attack, secure command and control and this rapid cross-domain connectivity. Earlier this year, we proved our capability for resilient, secure multi-orbit communications at mission scale. So let me show you a video of what that looks like. And when you watch this video, know that it's a test. It's a live demonstration. The live demonstration, you'll see this optical table in the front here. That's simulating a link over that 200,000 kilometers, proof that the system delivers the performance, resilience and mission-critical architecture the DOW requires today. Let's queue that video and see the optical checkout.

[Presentation]

Okay. Now you've seen how the system is tested in a functional checkout. I want to introduce you to [ Andrew Vrabec ], our General Manager for Space Technology. He's been leading the team that makes our space products work. He's going to walk you through just how challenging point in control really is to achieve on orbit. Because when you're dealing with laser communications, you're talking about beams the width of this of a single strand of hair that's traveling across hundreds of thousands of kilometers. So the smallest vibration, the slightest jitter and the link is lost. But [ Andrew ] and his team have mastered that challenge, and he's going to give you a demonstration that shows what really keeps a laser beam locked on target. [ Andrew ]?

Thank you, Mary. All right, I now have a laser. So look out. It's really fun to talk about this technology, the advancements that it's made, our capabilities, our performance and all of that. But I want to first acknowledge it's the people of our team that have made this from a strategy, a dream over many, many years. It goes -- it truly does go back to this angular rate sensor, this hunk of metal right here that is so powerful over many years of not only improving that, developing our fast streamer technology, all of that to get to a point at the component level. Then moving on to the full system and actually build it up to get to this demo point. We have amazing people in Space Tech, and I'm so proud across the board of everything that we've accomplished. The demo that you just saw, this was not just customers coming in, hey, look what we can do trying to sell something? No. This was a critical requirement for that major contract award that we received to demonstrate a [ TRL 6 ] capability. And by doing that with 2 terminals, what you see here is actually our Gen 3 terminal. Our Gen 5 terminal, we actually have back in the brick building, you'd be able to catch a little glimpse of it later.

But through that demonstration and our range in a box by attenuating power, we were actually able to demonstrate of over 200,000 kilometers, the ability of 2 satellites to communicate and pass information back and forth to one another. Now typically, you'll have anywhere between 2 to 4 of these payloads on any given satellite that is actually utilizing optical communication. So just remember that, too, when we start talking about the numbers and the quantities of satellites that Space Force is putting up. They're looking at GPS opportunities in the future, moving to laser communications. So that is a lot of work to do, and we're prepared to do that. So that demo, why were we successful? Again, like I said, it built on our heritage, but it really comes down to our line of sight stabilization and our pointing acquisition and tracking capabilities that we have. That's in our electronics, it's in our firmware that we develop in-house here.

It's in everything that we do, in our development and now moving to manufacturing this payload. So to try to humanize it a little bit, I just want to kind of step through a real quick example of what that point in accuracy, the jitter rejection what we're actually talking about here. So if I were to -- did it turn off, Mary? There we go. Oh, I was moving the slides. So all right. I had like three cups of coffee this morning, so realize that. But just right here, if I pointed it up on the screen. And normally, I'm pretty calm, but you can see that amount of shake that I'm doing right there. Now what if the distance was a little longer, and I pointed up to that wall. You can just see it further exaggerated that beam that's pointing. Now I want you to imagine from standing on our rooftop of our building out to the beautiful Manzano Mountains that you see out here to have the pointing accuracy required to go and close that link between -- that data link between 2 satellites, you need to have the pointing accuracy to actually put this link on $0.5 that's small from this distance right there.

Now when we're talking about long-haul lasercom, important discriminator there is the distances in optical comm that is occurring today at LEO represents roughly those satellites are about 50 or so kilometers apart from each other. When you're talking the distances for the programs that we're winning, those are, like Mary mentioned, over 200,000 kilometers. That's 5,000x greater distance that you need to have this precise pointing accuracy in order to close that link. It's pretty darn impressive. So as I mentioned, the line of sight stabilization, the pointing acquisition and tracking with this terminal right here and four of them are on each satellite this really truly represents the next generation of optical communication or laser com, as we call it. Not only showing that we can go and meet that total addressable market today but into the future as well. Thank you all for your time.

Well, thanks, [ Andrew ]. And congratulations on your new Board and your team. We talked about lasers in space. Let's go to lasers on the ground. LOCUST is our laser weapon system. And AV is the first company to pivot from science and technology to field-ready systems. We sold our first unit commercially actually to the U.S. Air Force 5 years ago. Now we've delivered 13 systems, providing full integration. And what do I mean by that? That means you can install any type of radio, any radar, any command and control system. It can be layered with other counter-UAS defense. That's very important. That's what we need, all the way from AV counter U.S. tools to others providing a full end-to-end kill chain. And we're expanding our product line to advanced target and tracking systems for gun sights and space domain awareness.

What's important is all the technologies leverage the same core technology, precision to acquire, track and point. In directed energy, we also have a rich history. It dates back to the Air Force's airborne laser program when we supported the development of a laser on aircraft. This family of products, why is it so important? It allows us to scale manufacturing. You do that faster through hardware commonality. So our strategy was very thought out. An AV_Halo PINPOINT, it's the software and controls, it's installed across the entire product line because in a fight seconds matter. Right now, we are deepening our customer base across adjacent markets and missions to include the U.S. Navy along with proprietary and commercial customers.

I want to tell you, we've delivered to the U.S. Army our Army multipurpose high-energy laser or AMP-HEL. And you will know that we have completed all 4 mobile systems, and they're completely integrated and outfitted with a LOCUST system, AMP-HEL's platform approach is agnostic and that meets the U.S. Army's future force design requirements that make DE a part of the force structure with hundreds of systems by 2030.

In that middle picture, you'll see LOCUST is pictured on a joint light tactical vehicle or JLTV, that's pictured in Yuma proving grounds for government acceptance. Those are rugged desert trials. They validate your system performance under exactly the conditions the war fighter faces. Now I'm going to ask you guys to look closely at that image on the bottom right screen. No, it is not a stock or simulated image. This is the same AMP-HEL system in the middle, pictured in an in-theater exercise after that Chinook sling loaded the AMP-HEL. And what you can see are the war fighters and the conditions they're operating in, Dusty sands, and it's hot. I can tell you that. But even in that setting, we're at full mission capability. That proves our systems are operationally ready and reliable.

Typically, new systems that are introduced only have about 75% operational availability. I told you how hard that is on a program like SCAR. But to tell you new technology like LOCUST that we've delivered the 13 systems in field. They have over 90% availability. The army is right to place lasers in the battlefield because the rate of production of low-cost drones from our adversaries like China is on the rise. We can't match Chinese systems for systems. We do need asymmetric technologies like LOCUST. This one scale, it's mobile, and our AV_Halo software-enhanced directed energy system, it changes the cost curve to that cup of coffee in front of you per shot, and it makes lasered-layer defense a reality. I want to show you the system in action. This is a live demo of our LOCUST laser weapon system.

It's actually coupled with our AV Counter-UAS, Titan and Titan SV systems. What you're going to see is a full end-to-end kill chain, demonstrating the power of the system's ability to detect, track and defeat a drone in seconds. This also happens to be the system if you're going to take the afternoon road trip, you're going to see down south. So what you're going to see is the ability to notice how the laser comes out of the Stryker, we're going to let you go in the Stryker today. So let's watch the video.

[Presentation]

So looking ahead, our road map builds on AV_Halo PINPOINT IP. That includes our tracking and control systems, and we're expanding it into 3 critical expansion areas as shown on the bottom of the chart. First, we're scaling to systems of 150 kilowatts. This power directly addresses the Golden Dome counter cruise missile threat. That's the next layer of power for layered defense. Second, we've launched a new product line using our acquisition tracking and pointing hardware with AV PINPOINT upgraded with AIML. That's this target and tracking system for gun sites. So if you want your gun to shoot where it should, you want to use one of these systems. That AIML upgrade will upgrade to reduce the target and tracking time for fixed and mobile gun site systems.

And just in the past 12 months, this product line has already secured 4 new contracts with 4 new customers. And lastly, we're applying the same proven IP to a new flagship adjacent market. proliferated space domain awareness. We've talked about the hundreds of thousands of satellites on orbit today. We need to be able to track those, find them in a proliferated architecture. And just earlier this year in March, we beat multiple defense primes, we were awarded $100 million to begin building a prototype system. So that took our expertise and field-ready systems into an entirely new mission set. So our AIML enabled AV_Halo IP, it doesn't just power today's products it's fueling tomorrow's growth markets. And I'm pleased to introduce [ John Geraghty ]. He's our General Manager for Directed Energy. John has led the teams that turned LOCUST from concept into a fielded system and he's driven the creation of the gun sight and tracking programs. John is going to show you a little bit about the tracking system.

Awesome. Thank you all so much for your time today. I am super excited to be here. I think I have the best job in the company because we are actively disrupting the battlefield today. So some of the technology that you saw in that video, an awesome video, by the way, and we can't wait to show you in theater or in our simulated theater today at the range. But it's really hard on the battlefield today to track drones. You see traditional weapon systems in effect are struggling with that and conflicts like you see in Ukraine. Now where we're differentiating that is, and like you saw in that video and you'll see firsthand is being able to track those drones not only in clear blue skies, but down in the clutter where radars and other effectors struggle. And that same technology, we're scaling into other disruptive markets like Mary mentioned. So as we've dominated the directed energy counter UAS space, we're taking an AV PINPOINT software scaling it into this new market of targeting and tracking systems like gun sights.

We like to think that if you can shoot a laser, you most certainly can shoot a gun, and so fundamentally, we're taking that software and making it as easy to use as possible for operators to track, detect and engage threats regardless of the effector. And it's so easy that they're all powered off of just a simple Xbox controller. And so we're taking operators with 0 experience with these weapon systems and effectors and just a matter of a couple of hours training them up to be lethal war fighters in the battlefield today. We're super excited to show you that on our high bay tour, as we have multiple systems that are getting ready to be delivered to new customers, but also on the range today as we show you the real power of directed energy and the UAS fight today. Thank you so much, Mary.

Thank you, John, and thank you for your team for showing us where the technology is headed. That concludes the highlights of the AV Space and Directed and Energy Group. You've now learned systems that we perform in space across multiple orbits and on ground from RF SATCOM to directed energy. You've also seen the people behind the technology who make it all possible. Our technology is not science fiction, we're ready to address the market growth.

Now I'm excited to tell you, you have a break, approximately 15 minutes. So thank you for that. Thank you.

[Break]

Hi, everyone. We're going to go ahead and get started with our Q&A. Can I have our panelists join me up at the stage, everyone grab a water or something and take your seats. [Operator Instructions]. And Wahid's going to go ahead and lead the discussion, if he doesn't take the question himself, he'll pass it to one of the panels we have here. In addition to the speakers that you've already heard from today, Church Hutton is also going to be joining the panel. He is our Chief Growth Officer for the company, manages everything out of our D.C. office.

Okay. Is the microphone turned on? I think it is. You have -- great. Okay. All right. So what we're going to do is we're down to the final stretch another few minutes Q&A before we get ready to go walk, get the floor. I think the next 2 sessions are the most exciting part. What we want to do is we've got all the key leaders here. They will answer the questions. Of course, as I said from the beginning, this session is for all of you. Welcome any questions you may have. Anybody has any particular questions they want to start with, Andre right there.

So yes, no, thanks for the breakdown on AV -- by the way Andre Madrid, BTG, I think most people know me here. Yes. So thinking about AV_Halo I guess, to really dumb it down, just how does this compare to other software platforms out there. Everybody talks about being modular, open architecture, platform agnostic. But really, what is the enabling tech and how does it differentiate versus some of the competitive solutions that are being pitched out there. It's obviously top of mind to with CCA autonomy packages being awarded in the past week.

Yes. Scott, do you want to take that one?

Yes. So I think the way to answer that is, first and foremost, we're doing the open architecture, we're doing amongst our own platform to allow for more of operational excellence size. So internally, to allow our own ecosystem we built. We're doing it amongst our own pieces of software, so that, obviously, the communication cycle, Trip talked about being able to make decisions quickly. Doing that within our own platform first, and we're proving to ourselves that, that is integratable at that boundary before going like external with it. I think where a lot of companies break down and have issues is when they think they have a nice tested interface that they think they have an interface that they've exposed having never really done it at scale, and it is when it falls apart when the integration kind of falls apart.

So I think that's, first and foremost, one of the bigger differences between us. I think second, we are looking at this problem from kind of the edge first. I talked a lot about owning and dominating the edge in our software space. We started there first and kind of made our way up in some of these other more -- these larger C2 systems. They've kind of started at like very high level and centralized and kind of starting to move down. And there's a lot of challenges, I think, they're going to find along the way that because of the kind of vehicle and drone manufacturer we are and the kind of software companies we've acquired like Tomahawk, we understand the networking issue that comes with all that stuff. We understand bandwidth and data rates and all these kind of things that some of these other companies that are claiming they're going to get there, are just now finding out and having hard times with it. So I hope that answers your question.

The way that I would also add to Scott, is that I really -- it's a very fair question, right? Because as an investor, as an analyst, as an industry player, you want to know how does this compare and differentiate? It's really hard to know what others do. And I would ask you guys to ask him to explain exactly what their software does and how it's implemented. What you saw from us is we've got a bottoms-up approach to build the layers of the stack, what we call the suite of the software. And it starts from the smallest elements of the assets on the edge and build capability on top of each other and build that ecosystem. Number one.

Number two, it's designed from the ground up to be interoperable, not only with our own platforms, we actually integrate with a lot more competitor platforms today than on our own platforms. The Tomahawk software, for example, Kinesis is integrated with more other types of drones than our own drones today literally. They've got 10, 20 different platforms, the ground robots, UAVs that they've already integrated with. So the challenges that you refer to is bandwidth, communication protocol, differences, APIs. We've solved all those things for a lot of different players. And I'm not so sure what others do, but our commitment is exactly focused on what the customers want and how we build the ecosystems around that. And we're open to actually integrating and operating with other advanced battle management systems, too. You've already seen that in some of our platforms that we work with other platforms, other -- it's already in the field and fielded today.

So there is a difference between people saying our software will do this versus our software is doing it. We're in a former -- latter category. Our stuff is already fielded, working in many, many, many cases by the thousands. Now I'm not saying that there's not room for more players. There's definitely room for more players. How they get there and when they get there and they achieve that, then that's a bigger bar to overcome.

One -- Church Hutton, Chief Growth Officer. One additional sort of comment I'd make on this, and we were just having this conversation. So 2, 3 years ago, all anybody could talk about was JADC2. Then that has sort of gone away. And we're not attempting to eat the elephant here in that JADC2 kind of a way. So you look at what he described as Kinesis AV_Halo command. That is JADC2 for the battalion and below level in the Army, and it's demonstrated and it works and it's integrated with all of our platforms and a bunch of other vendor platforms. So we'll as we move into production and get into the field, you have something that is working. And then that scales across customers and across domains.

Yes. I will add one more thing to this, it had triggered another thought. People don't really understand and appreciate the amount of R&D dollars that's going in our category. Folks talk a lot about we're spending this much money, this much money. In the last few months alone, we've won hundreds of millions of dollars worth of CRAD and IRAD that we're investing in this ecosystem. I don't believe that there aren't too many players that are investing as much as we are in this area, very focused on this area. Ours is very, very focused. Ours is not boil the ocean. We're very focused on the areas that we have, and we're winning programs and contracts that keeps adding to our capability. And so it's a machine and an engine in my view that keeps sort of feeding itself investments to keep improving with customers alongside us. So it's a pretty powerful engine, I believe, in the long run for us, in that regard. I think Greg had its hands up before. Sorry, I'm just going to go -- okay.

Austin Moeller, Cannacord. Can you talk a little bit about how the Freedome Eagle-1 in that sole source contract is differentiated relative to like Raytheon's Coyote system, which just won a $5 billion contract. And I know that includes radars and launch systems as part of that contract. But I guess, how would you characterize the positioning of that system versus the Coyote system.

Yes. So that is a very good announcement that just came out this week that I think proves a couple of points. Number one, it is a counter UAS solution that Raytheon has won the Coyote $5 billion contract, IDIQ, and it's for multiple years, training, launches, et cetera, et cetera, number one. What it proves to me, number 1 is that the market opportunity for this stuff is massive, all right? The solution that Raytheon has today is a solution. That's the only solution out there today. And it's a solution that the U.S. Army themselves are not happy with totally. They would like a more improved solution.

Raytheon was one of the competitors on this FE1 program called LRKM, I believe, is called LRKI, long-range kinetic intercept is the name of the actual effort within the U.S. Army. My understanding was that the Raytheon solution was a modification to existing Coyote. Even with that does not meet all of the U.S. Army's requirements. Our solution was designed from the ground up, clean sheet of paper to meet all of the requirements of the U.S. Army. I just mentioned one specific area of differentiation. U.S. Army would like the next-generation counter UAS missile, this Freedome Eagle category to be agnostic to any radar system. They want it to be completely open and modular to any radar system that's out there. They can pair it with whatever radar system for the tech mechanism.

Ours is designed exactly to do that. Coyote is not. That's one of the probably 20 different things that is differentiators. We've designed this for specific mission requirements they have in terms of altitude, range, kills on target, cost points, et cetera, et cetera, et cetera. So there's a whole list of things that we go to -- we could talk about. I'm not sure if you have all the details, but there's several differences. And the U.S. Army selected us only so far. So we're the only awardee on this contract. And we've got to deliver 18 or so -- 80 systems or so in the next 18 months. And that takes us through an LRIP program. And that shows you what the potential for this product is. That's why if you -- I gave you my top 10, that's 1 of the top 10 programs that I believe and product that I believe it's a $1 billion-plus franchise long term. It should -- the economics is compelling, compelling. We cannot just shoot $2 million to $3 million missiles at $50,000 to $100,000 drones. And if there are hundreds of thousands of those drones, they need another solution. And that's exactly what FE1 is designed to do.

Yes. As Wahid said, Freedome Eagle-1 is addressing a capability gap that exists within the DOW today. That cannot be addressed by any existing systems that are affordable and cost-effective. So we can't -- as Wahid said, we can't shoot down group 3 [ Shahabs ] with $1 million missiles. We have to be able to do that much cheaper with counter UAS missiles and with directed energy.

Okay. Next question. Sorry. Somebody behind.

Colin Canfield, Cantor Fitzgerald, appreciate it. One quick housekeeping on that. So is it fair to assume that there will be a follow-on award or another award 18 months from now, where AeroVironment is the winner on that system. And in the interim, what is the kind of size and timing of the missile interceptor contract?

Yes. So I think this is beyond just -- beyond just the Freedome Eagle-1 or the next-generation counter U.S. missile. I think the Army strategy as of today, it may change tomorrow, may change next year, may change 6 months from now is they are trying to walk away a fine line between a program of record, locking in, in the program of record, then a capability refreshment every 2 to 3 years. So today, they selected our missile or weapon to be developed and field it. If we get to that a year from now, 1.5 years from now, and we deliver and we perform, chances are we're going to get the next tranche and a big award for so many units. I'm not sure exactly what the numbers are, but the program requirements are pretty large. If we -- if there's something better in the market, Army wants to keep an option open and says you know if there's something better in the market than we want to go off to the market again, see what happens.

If the existing solution requires improvements, we may want to complete that in ask someone else and it were AV to be improve it as well. So you should expect that, in my view, in a lot of different categories, small UAS, Group 2 UAS, 3 OAS, loading munition, LASSO program, all of these things in order to basically create a better happy medium between long-term locked in vendor lockups program of records versus I can't just carry 5 players. I like this. This works. And if technology improves, I'd like to have optionality that I can switch. I think that's the mindset that I see within the U.S. Army in general. And I would expect this to be the case on Freedome Eagle-1 as well. So yes, after this period of performance, there will be a transition, another award for potentially more depending on our performance, and the Army's position.

And to answer your question on the current contract, it was recently published by the Army through AMTC It's a $98 million contract for the current phase.

I appreciate that. And then one quick question on the strategy side. If you could maybe talk about kind of your chipset strategy and how you're sourcing across the segments for the chipsets and then also the level of kind of like commerciality and testing that you are doing with those chipset providers and how it's informing your EW and digital like beamforming strategy?

Yes. I mean so we use a significant number relative to our peer players, not necessarily relative to the market for these chipsets because the market for these chipsets are massive. It's -- we're not even a little dot on that or a drop in a bucket in general. We're very much close with companies such as NVIDIA and Qualcomm and AMD for the chips that they make. We -- there's an effort with NAV ourselves on standardization across different platforms and boards and standardization of processors and layouts, commonality. A lot of the AI autonomy capabilities you see today essentially is the same that goes into all the other birds or vehicles, as you could see.

Long term, there's several areas of commonality we've already focused on. I don't want to go into details of that because some of it is our secret sauce. But things such as avionics, ground control station, autopilots, gimbals, payloads, autonomy, automatic target recognition, these software modules are going to be incredibly consistently similar across the board. And in fact, even the hardware platforms will have slight modifications primarily for form factors, swap, size, weight and power. But the pure performance requirements are going to be the same. They're going to run on similar embedded software platforms, similar operating systems, similar development. And also the iteration and improvements is going to be across board. So when we make an improvement on one module and next-gen module, 20 different platforms will benefit from it, for example. And so, a, we're in touch with all these folks. We've got very close strategic relationships with them. We keep in touch on their road maps. They understand our road maps. They actually have -- NVIDIA has a very dedicated team, specifically focused on aerospace and defense. I'm not sure if you guys have noticed, they've got an event, they're going to be at AUSA. They've got an event there as well and we're very close with those guys, similarly with Xilinx and the Qualcomm processor, et cetera, et cetera. I think Ken had his hand up earlier.

Ken Herbert with RBC Capital Markets. Two questions. The first is you've got a pretty aggressive sort of product portfolio ramp here. The company now has sort of reset R&D as a percent of sales at a lower level, reflecting the blended operations. Does that hold at this sort of 7% to 8% level? Or do we see maybe a reversion back to sort of legacy AeroVironment elevated R&D levels.

Yes, go ahead Kevin.

Right now, we're still aiming for the target that we're at the 6% to 7%. Obviously, it's probably one of our most difficult challenges from a long-term planning perspective, Mary alluded to that we're in the middle of that process to really allocate that to the markets that we're addressing. So our commitment, though, is to keep it at that level, not to bring that down to get EBITDA leverage. I mean the EBITDA leverage should come through increased product sales and through SG&A leverage versus R&D leverage. So we at least are committing to get to that level, could be at the high end of the level in the shorter term, things like that, but not to go back to 10% to 12% type of thing at this point.

Great. And if I could, across your portfolio and maybe use a few examples. How do you think about pricing? Do you feel like with all the pressure on the volume ramp and the competition, you're getting appropriate pricing? Because I think you've done a good job. It seems like of holding pricing on Switchblade and some of your legacy portfolio. But clearly, as things evolve, do you get a sense the government is willing to really pay what you think is a fair price for these products? Or are you finding that you're having to maybe get a little bit more aggressive on pricing?

No. I think generally, I feel pretty good about the pricing for a few reasons. Number one, 15 years ago, that same question existed. We were a very much smaller player, a couple of hundred million dollars worth of business. And there was a sort of -- what's -- yes, a thesis that you're not going to be able to hold the margins as the business grows and the volume goes up, you're going to have more competitors and AV is going to be pushed and squeezed for margin. Our margins actually in small UAS has been able to maintain or actually in fact, even improved a little bit. Same thing with Switchblade. As the volume goes up, we've actually been able to improve. There are several reasons why. The biggest myth if you ask me is the following.

A lot of people think that AV is not the low-cost manufacturer. There is nobody that makes this stuff a lower cost than us. The volumes that we're talking about today, we are the lowest cost producer of small UAS, loading munition, counter UAS RF systems in the world today. We compete with these folks all the time, including the Silicon Valley startup or VC-backed companies, not 1 or 2 or 3, but dozens and dozens and dozens of them. We've done it over the last decade. So somehow few folks believe that as the volume goes up, we're not the low-cost manufacturer, and we can't be competitive. That's completely actually not true, in my view, number one. Number two, when you stack up the requirements of the U.S. military and these things, all of a sudden, a $1,000 FPV becomes a $15,000 drone.

And that's been evident that a great example of that is the effort that DIU had with SRR, short-range reconnaissance. Their price target, I remember,, 5 years ago was less than $3,000. The systems they're buying today is still $20,000 plus, up to $30,000 systems, and that's a quadcopter. And so when you put -- layer all the requirements that the U.S. Army has and other customers have for reliability, ruggedness, security, cybersecurity, et cetera, et cetera, it becomes that much. Could the volumes reduce the price? Yes. That will primarily happen with consistent more supply chain and supplier efficiencies. And I believe we'll have an advantage as it goes there because we're the ones that have the best expertise and the highest volumes than anyone else. So I feel good about the fact that we're going to be able to maintain that over time. Could it change? I mean quarterly, our gross margin percentage fluctuates a lot. It's primarily because of the fit mix and the chunks of contracts that we get because of different products.

The last comment I'll make on this is following. We've actually -- I would say, one of the companies that have mastered the art of knowing how to take a product that we develop first under a joint development effort, AV and the customer and then transition to some point of commerciality. Almost all of our small U.S. today is a commercial item. We published a price list as a catalog, and we sell the customer, we don't have to provide cost justifications. We moved on that front with Switchblade, the majority of the Switchblade, not all of it and as modules, subsystems that we actually are selling it as commercial items. And so we're doing the same thing with SCAR systems today. Titan is the similar exact same scenario. LOCUST will be in the same bucket. So the BlueHalo products, which are a little earlier in transition from development to production is following the same exact, what I call, sort of scenario or movie. And I think over time, that's been our recipe and strategy since we've been a public company. And I think we've been quite successful at it.

Just to add on what Wahid said or Trip earlier, we're not selling posters or insurance, right? We're selling products that have to work and they have to work every time. And the customer is willing to pay for capabilities that are going to provide the value to the war fighter when they need it. And so they're willing to pay a premium for that. And we provide those capabilities, and we're willing to compete with the competition as we do every day.

Byron Callan, Capital Alpha Partners. Two questions. You may have touched this a little bit, Wahid, when you're talking about the Army, but all the changes that have been going on and how the DoD or Department of War is acquiring things, [ JSAs ] getting thrown in the wood chipper. How does it change how you align with your customer and how you engage with them? And what kind of risk you need to take? And the other thing you've talked about scaling is an advantage. Can you talk about data as because I'm sure you learn an awful lot from what's going on in Ukraine. Is that a proprietary advantage for you?

Yes. Anybody wants to take that or you want me to take it?

Okay. Okay, go ahead. Why don't you just take it. I'd like others to answer some questions too.

So the way that I think about what's happening in the current environment, one, you have to be ready for a dynamic set of events every day. So what we've learned based off every major product and program, we actually have maps that show who all the decision-makers are, and we adjust those as needed, maybe on a daily basis. Okay? It's really about customer intimacy and understanding who has the decision authority, who is maybe establishing the requirements or wants help establishing requirements, right? Because that's what we see when administrations change. So I would say I feel very comfortable and confident in our team that they are laser-focused on their customers. You hear me say the word mission, mission equals customer for me.

And if we're not talking to them every day, like we don't need a big trade show to talk to our customers. We have established set meetings with every major decision maker within the ecosystem, both within the ICE and within DOW data. So I'll let [ Trace ] speak a little bit more to his team, but I'm going to talk a little bit about his team because it used to be part of my team, and I'm very passionate. Titan is a great example. We were very intentional early in the Ukrainian conflict to support our customers. And that data because all of our Titan boxes run off of AIML has really informed us. And the question I've gotten is like, hey, if you're not actually living in Ukraine, how do you adapt? How do you gain new technology, which is probably where you're going with this.

And so what we've done, we've stayed intimately involved with our customers, and we believe in what we call customer success, not field service. And customer success is being shoulder to shoulder with the war fighter, understanding both the dynamics of what happens with hardware, but more importantly, the data that's coming into our systems that can collect data. We shoot that directly back in, and Mary has a couple of cool IRAD programs that she could probably show you some examples today as we take our tour, and we'll point those out as we go. But I feel really comfortable that we are highly informed of the current threats. Hence, why we hug a cactus every day and push our teams really hard because it's a little concerning. So do you want to add anything, Trace?

Yes. I would say we do have a competitive advantage, right? We're in 55, 60 different country, allies. We have people in Ukraine on a daily basis, our own employees that are there, providing that feedback from the customer. And we are constantly evolving our products to address the threats that we see in Ukraine and what our other customers are telling us that have our existing products. So it is a competitive advantage for us. And as long as we're agile and we update our products and we refresh them and we develop next-generation systems, we will have an edge and an advantage.

And if you recall, even in the Ukraine conflict, the initial aid packages that went to Ukraine, it was a whole bunch of different things. If you look at the picture of that and you'll make a list of all those things that the U.S. gave and what was given to them repeatedly more than once are the things that actually have been battle proven, and the Ukrainian says, "I want more of that. I don't want any more of this." And so we've been lucky and fortunate that we've been one of the most common repeated -- there's been some few other things, HIMARS, 155 caliber, et cetera, motors.

So there's been categories of things that are battle proven that is actually working that has gone repeat, repeat, repeat, repeat tranches to support Ukraine. Many others have gone the first one and then the answer has been, I don't need any more of that. We've seen examples of our customers using them as spare parts for other drones, for other systems in the field or making -- breaking them apart, making new things from them. I mean we've seen real examples of that in Ukraine already. But I do believe that we have an advantage in this area in the market.

I'll add one more to that, too, sorry. I'm the AV Halo guide today, right, so I'll talk on that. On the data side, certainly, what we're finding as we're operating in theater with more capable actors is that there's this game of cat and mouse. Certainly, an ability to update software to be able to create change behaviors, it has got to be -- and we do a pretty good job of that today, but we want to drive that even better. And in order -- and as you've seen with the administration and the emphasis on encryption and these kinds of things and cybersecurity, a big part of the AV Halo ecosystem and platform is also the development cycle, the development process, bringing all of that into a centralized way of doing things so that we are having a focused element within the businesses that are worried about cybersecurity and the way we develop all our software is getting the benefit from that kind of every time. And then also how we deploy the software, being able to do it very quickly and in a more modern fashion than is traditionally done on the battlefield today in a secure manner.

Peter?

I'm sorry, Greg, I'll come back to you after that. Mic was closer here.

Yes, Peter Arment from Baird. Yes, Wahid, if we were here like 2.5 years ago, would have it all been a Replicator and discussions, obviously, before the BlueHalo. And so maybe, Trace and you both want to weigh in on this. But just regarding the change administration, we've seen a lot of discussions. We've seen contracts move to different program offices as well. Maybe if you could give us a state of the state around kind of the changes that you've seen from Replicator into now these changes in these new program offices and of course, now DIU kind of being absorbed by Emil Michael and his team inside the DoD. And obviously, he's a Silicon Valley guy. So he has his roots kind of probably trying to support companies like AV.

Yes. So I mean, there's been some articles recently about Replicator. I'm not sure if you guys have seen or not. We're actually a successful poster child of Replicator because we were one of the very few companies that were selected as part of the tranche 1 Replicator. We've delivered systems for that, and the customer has been very happy. It's been a success story for the Pentagon. It's been a success story for DIU. That's not been the case for a lot of other efforts within DIU. DIU had a lot of great ideas, still do, but I struggled with the ability for them to be able to actually thread the needle given all the sort of forces that are working there.

What people don't realize that the defense industry, you guys do, a lot of you do, but in general, the public that -- it's a very massive machine. And shifting or changing it dramatically, it's not that quick and that easy. There's lots of forces involved in it. And so you'll see changes that come and go. And -- but I think a few things are going to stay pretty consistent. There is a shift in this area, as I said in the call, the U.S. has recognized that we're behind. I think there's a fire lit underneath all the departments, services that we got to move faster. We got to break the rules and the way that we do business, meaning in the department within the Pentagon and within the services and program offices, acquisition rules, program timelines and the JCIDS process, all this can be modified or changed, right?

I believe it all speaks volumes to our DNA. It's just exactly what we've been doing for years and years and years. I sort of don't understand what a lot of the VC-backed companies complain that they don't know -- the U.S. -- they don't know how to sell to the U.S. DoD. You can't blame that on a customer, for God's sake. I don't know how to sell to a market, and I want to be a player in that market. How does that sound for any industry? It doesn't sound really good. So we have to learn how the customer buys and essentially may not be the best way to buy, but it is the way they buy. And they are the customer, and we have to adapt to that.

And we actually, as a company, have done, I believe, really well, knowing how to do that. And we've taken calculated risks. When the Ukraine war started, we went and ordered 1,000 to 2,000 more, 3,000 total Switchblades. Parts and material, we built in advance. We knew that the demand was going to be there. We called it right. We built a factory in advance of that. We -- I was -- we were right on that, too.

So we are ready. In fact, the reason why we were [indiscernible] is to have some funding to be able to pivot and act on this because I do see the list of things you saw there and the list of priorities that I mentioned, the excitement. As the U.S. starts to -- the services to acquire some systems and they operate really well, the chances are that they're going to direct more funding to buy more of that. There is a need for counter UAS. I had this discussion in the hallway with one of our analysts about direct energy counter UAS LOCUST. Today, in the U.S. airspace, you're not using -- there's no use of it.

We're one of the first systems that have been deployed to the U.S. Army for the border, Southern border. And pretty soon, that will become public well-known phenomenon. And that could be a pivot -- a pivotal point in the industry in terms of acquiring an adoption of more directed energy counter UAS systems. Same thing with the other systems you see here with our allies. So I think there is definitely a lot of momentum in the areas that were sort of positioned quite well in that regard. I believe Greg had his hands up. Yes. Go ahead.

I was only going to add one point to what he said. The change that we've seen in this administration is very visible, but it's not unlike change that we see at every administration. People are moved around, this Assistant Secretary takes on a new role, there's some reconsolidation or change of organization. That has occurred at every presidential change. For us, who owns the concept, who owns the requirements, who owns the budget authority and who's the end user. And those things will change. We see it, right, in our own products. It was PEO Missiles and Space for Switchblade, now it's PEO Soldier. No problem, right? We have those -- that intimacy that Trip talked about, and then we just turn it back on.

Yes. I think we should go one more question before the tour, am I right?

Yes. Yes. Okay. Louie DiPalma from William Blair. So the AeroVironment team closed the BlueHalo acquisition, I believe it was on May 1. And it seemingly has been transformational, and this has been an open house to showcase all of the different products for BlueHalo, but also talk about the synergies and how AeroVironment combined with BlueHalo to become AV.

So I'm wondering over the past, I think, 5 months, what have been the initial customer reactions to the combined company? And what have been the synergies in terms of your ability to cross-sell counter-drone products with your existing small UAS products in your Switchblades? And have you made progress in terms of taking advantage of the AeroVironment like allied relationships and being able to export the BlueHalo products to your 55 different allies? And what else is on the timeline in terms of synergizing both companies? We have seen the AV Halo software, which like integrates, but what else is there in store?

Sure. Thanks, Louie. I'll talk about the people first. So on my team, our Head of Business Development was the Chief Growth Officer for BlueHalo, James Batt. He's got 30 years in this business, fantastic capability. On the government relations side, we've got the former Deputy Comptroller at DoD, Blake Souter, who's doing fantastic work in Washington, D.C. Our branding and marketing is run by Paul Frommelt, who was leading branding and marketing and comms for BlueHalo. So from an integration of personnel and teams, that's been fantastic.

In terms of taking what AV had in its market access on the international side, I don't know -- I don't want to say too much, but we have large opportunities with legacy BlueHalo products moving into the international space that if we haven't yet, we will be announcing soon, which have been fantastic. In terms of connecting the many counter UAS capabilities that come from this organization and the customer sets and intimacy that AV brought, that has been fantastic with the standup of Task Force 401, with the elevation of counter UAS into -- at the OSD level as an integrator, right? We've been able to pull SME and SME, right, take them up and sort of expose everyone to the holistic capability. It's been fantastic so far.

Yes. And so, just to add to your point a little bit more on a big -- higher level. I firmly believe in this merger of equals, so to speak, that we're going to build a better business, better company for our customers and the mission that Trip talked about. The culture has been amazingly positive. You see the culture that you will notice as you interact with folks here, it's very much similar to AV. I believe it's a generational opportunity for AV to be one of the next defense tech primes. There's room for 2 to 3 maybe, not just 1. So I think we've got a tremendous report card, qualifications in this area as a joint force.

The products and capabilities are amazingly complementary, almost no overlap, almost. We've chosen from day 1 to go for a very aggressive deep level of integration. Day 1, as Kevin said before, we've gone to take businesses and product lines and move them around within different segments, different products, business units [ in Group 7 ], right? And so we're merging very, very heavily all deeply inside. Why? It's because that's what's required by our customers to deliver the best-in-class capability and do it effectively and competitively, we've got to be the best. We do not want to settle for not the best, #2 is not enough for us. Our ambition is the #1, be the best, first -- best-in-class.

And so we've had challenges, yes. But overwhelmingly, we're very happy with it. In the meantime, we're upgrading a lot of our enterprise systems. We just went to our Oracle Fusion second phase, which is our MRP, ERP and our product line management module that is being rolled out. It's effective right now. It's running the company. And we have planned phases of -- implement that across BlueHalo. In fact, the site is the next one, one of the next sites.

So we're going for not a cosmetic level integration. We're going for a very aggressive deep level of integration. Why? It's because we believe in the synergies, both in cost but a lot in growth in the future, and it will position us really well for that in the future. And so far, we're very happy. I think you could see it. Retention has been really great. We're going to lose some folks, there's no question about it. We're going to have some areas of cost synergies that we're already taking steps and in some areas, we're ahead actually, and -- but we will be able to deliver.

I think we're going to do -- I'm more bullish than I was at the beginning, honestly. There's always demons in the back of your head says, what about this, what about that, what about this? But the positive surprise has been overwhelmingly more better than the negatives in general. Anything else you want to add?

No. You want to wrap it up?

Okay. I am so sorry because we are -- got to go, and we don't want to keep you guys here too long. We're going to now -- I'm going to ask Denise to come up here. I want to thank all of you for this, this ends this session. Do you want to do anything else?

No.

No. Thank you for coming, of course. The next 2 things are important. Denise, why don't I hand it over to you so you can give us direction on what to do.

This concludes our webcast portion of the activities today. So what we're going to do inside the room here. First of all, you can leave all your belongings here. You'll see in front of you, you have a little box that is yours to take home and keep. It's a little gift. We really appreciate you coming all the way out here. We're very happy to host you.

The next part of our day is going to be the tour. So if you look on your badge, you have a little sticker. It's going to be either red, white or blue. This is going to be the group that you're going to tour the facilities. We have 3 different tours going simultaneously in a round-robin fashion. If you have a red sticker, you're going to be with Sheena. So you guys are welcome to leave your stuff here, you can stand up, you can walk with Sheena. Blue flags are over here. And the white flag is up by the food.

Mason, right?

Yes, with Mason. If you have a connecting flight, if you need to leave at like 12:30 or 1:00, can you just let your tour guide know, we will help get you to the airport on time. Otherwise, we have shuttles departing at 12:15 for the airport and 12:15 for the optional site tour. Boxed lunches will be provided.

Thank you, everybody. Thank you so much for being here. And I think the next 2 phases, you're going to get more excited about the things that we've got. So we'll walk with you.

Good day, and thank you for standing by. Welcome to AeroVironment's First Quarter and 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 your speaker today, Director of Investor Relations, Denise Pacioni. Please go ahead.

Thank you, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's First Quarter Fiscal Year 2026 Earnings Call. My name is Denise Pacioni, Director 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 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 & Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, September 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 first quarter fiscal year 2026 Earnings Conference Call. I'll start 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 a very strong start to our fiscal year with excellent first quarter financial results setting new records for the company. We are better positioned than ever to drive industry-leading organic revenue growth and profitability. Our acquisition of BlueHalo has created significant new growth opportunities in critical areas that are aligned with our customers' highest priorities, and our integration efforts are progressing ahead of plan. Our first quarter results benefited from programs tied to this acquisition, and we look forward to building on that momentum in the coming quarters.

Now let me summarize the key messages for the first quarter of fiscal year 2026, which are included on Slide #3 of our earnings presentation. As a reminder, this is the first quarter where our results are inclusive of our recent BlueHalo acquisition. First, we achieved another record first quarter with revenue of nearly $455 million. Second, bookings for the first quarter reached nearly $400 million and our funded backlog grew to $1.1 billion. Unfunded backlog is now at $3.1 billion. Third, we introduced several innovative solutions in Counter-UAS, Space communications and Directed Energy, among other areas that are directly aligned to our customers' urgent priorities and represent multibillion-dollar market opportunities over the next several years. And fourth, we're maintaining our fiscal year 2026 guidance with revenues between $1.9 billion and $2 billion. Overall, AV is uniquely positioned as a leading defense stack prime with our innovative product offerings, along with the experience and capacity necessary to scale manufacturing on an expedited time line.

This is what is required for the urgent national security priorities of our nation, and our allies around the globe. We have worked very hard throughout the past few years to position AV for such [indiscernible] set of opportunities. Since our last earnings call, we announced several key program wins and milestone achievements. For example, yesterday, we announced a nearly $240 million award for our long-haul space laser communication terminals that will be delivered over the next 3.5 years with options for additional systems. To put this in perspective, we expect the laser communication is going to be one of the most important aspects to warfare in the space domain and represents a multibillion-dollar opportunity for AV. AV is clearly leading the industry in this critical area and technology.

Our technology allows the secure transfer of high-bandwidth data in the most challenging space environments at the fastest rates and across very long distances than any other current capability on the market. This is a strategic and critical milestone for our customers, and we're now excited to move it from development into full rate production. With our decades of proven track record, AV is well positioned to efficiently scale our laser com manufacturing to capture growing demand in this multibillion-dollar new market. In addition, AV was also recently awarded a $95 million contract to further the development and scale manufacturing of our [ 3.1 ] or [indiscernible] for long-range kinetic interceptor program for the U.S. Army. Dismissal is designed to deliver extended range, higher altitude and all-weather performance against a broad set of emerging threats. AV's [ F1 ] missile addresses a much broader set of requirements at much affordable price points than anything available on the market today.

Our nation needs capabilities such as [ API ] to affordably defend our nation against such emerging threats. This award enables AV to enter and disrupt a multibillion dollar missile defense market. The U.S. [ automy ] considers our innovative [ SDN ] solution, the leading capability in this critical area. We're looking forward to sharing future progress with you on [ NB1 ] and our next-generation counter UAS missile efforts in the coming quarters.

Another key achievement in the first quarter was the recent delivery of 2 of our Counter-UAS inventory squad vehicle mounted LOCUST laser weapon system under the U.S. Army's multipurpose high-energy laser program or [ Appeal ]. We're set to deliver 2 additional joint light tactical vehicles, or JLTVs mounted LOCUST laser weapon systems next month for the second increment of the [indiscernible] program. These deliveries marked a major milestone in the U.S. Army's objective of operationalizing directed energy capabilities to defend against the emerging proliferation of drone warfare. Our LOCUST laser weapon system use of Directed Energy is a critical emerging technology that is key to defending against Group 1 through 4 drones and in the future, will enable defense against hypersonic missiles, cruise vessels and other projectiles are much lower in affordable costs. We also see this emerging market exceeding several billion dollars in the coming years and AV is ahead of most, if not all industry players to scale and capture a significant portion of this very large opportunity.

And finally, we delivered multiple P550 Group 2 UAS Systems along with training to the U.S. Army for the long-range reconnaissance or LRR program of record. For assistant low-cost, reliable ISR at the edge of the battlefield represents a shift in defense strategy around the globe and we believe our P550s performance specifications to meet the U.S. Army's program requirements better than any other competitor solution on the market. This [ program of record ] represents approximately $1 billion in value over the next 5 years, and AV is very well prepared to execute and deliver on it. The successful adoption of our P550 with the U.S. Army's LRR program should also lead to more international adoption of this capability by our allies in the coming years.

We've experienced such a trend with our other global franchises, such as the Raven, Puma and Switchblade. We look forward to continued progress with this significant program record. In addition to these significant program wins and milestone achievements last week we unveiled AV_Halo, a software platform and ecosystem that is hardware agnostic and unifies our suite of mission-ready software tools and offerings. AV_Halo clearly demonstrates the depth and breadth of our AI-powered software ecosystem for our end markets.

At launch, these software modules include our multi-domain command and control, intelligence analysis, synthetic training and autonomous targeting. AV_Halo blends the best of both Legacy AV and BlueHalo software solutions and offers our customers a comprehensive mission-ready suite of AI-powered software tools that empowers war fighters to dominate the mission across air, land, sea, space and cyber domains. We're excited to share more details over the coming months about how AV_Halo software enhances the speed autonomy, modularity and interoperability of our offerings to address growing market needs.

As the industry continues to grow and demand for our customer-driven solutions increases we are focused on leveraging our strategic partnerships to unlock new opportunities for AV, both domestically and abroad. Since our last earnings call, we have announced several key partnerships that will advance our long-term growth objectives and broaden our exposure in new areas. First, we announced a strategic partnership with [ Sierra Meta ] Corporation for a limited area of defense architecture under the Golden Dome for America initiative. This partnership focuses on integrating and aligning existing open architecture solutions using passive and active sensing, radio frequency, directed energy, kinetic energy, electronic warfare and cyber solutions and addresses the complete kill chain to neutralize Group 1 to 4 Unmanned Aerial Systems, Advanced Cruise Missiles and other next-generation aerial threats. With our broad suite of technological solutions, AV is uniquely positioned to help protect our nation by implementing a cost of active solution for sovereign missile defense.

Second, we signed a memorandum understanding in Denmark for expanding airport utilization for medium UAS training, demonstrations and customer integration activities in the region. And finally, we announced an expanded partnership with the Dutch Ministry of Defense to modernize and expand their Puma [ fleet ] highlighting the rising demand for adaptable mission-ready on food systems across NATO.

In summary, we're currently pursuing more than 20 different programs of record which exceed $20 billion in potential value over the next 5 years. Included in these programs are [ OPF Light and Medium ], [ One-way attack ], [ Lasso ], LRR, Laser Communications, [ MGCM, HMIF ] and additional options with our scar space program among several others. As we pursue these significant opportunities and programs ahead, we're also focused on managing the business efficiently during this period of high growth and capacity expansion. This past quarter, we successfully raised more than $1.5 billion through equity and convertible debt.

Funds were used to pay down debt from the acquisition of BlueHalo and the balance will be used to help support the company's growth, including necessary production capacity expansion. As we've discussed over the past year, our current facilities are capable of scaling manufacturing to meet rising demand through at least fiscal year 2027. We're making progress on our new state-of-the-art manufacturing facility in Salt Lake City, Utah, which will allow us to considerably increase our manufacturing capacity for demand beyond fiscal year 2027. As part of our distributed approach to manufacturing for resiliency and risk diversification, we now have manufacturing sites operating across 12 different states.

Now I would like to provide brief updates on our 2 business segments. Our first segment, Autonomous Systems achieved revenues for the first quarter of [ $285 ] million. This segment continues to remain a strong growth driver for the company as demand continues to increase for our family of UAS solutions such as Puma, P550 and JUMP 20. We anticipate further growth in our position [ Precision Strike and Powder US ] group for our Switchblade family products. Red Dragon [indiscernible] as well as from our RF cover US solution, [ Titan ] and our next-generation Counter U.S. Missile Defense System, [ SB1 ].

Now on to our second segment, Space, Cyber and Directed Energy, or SCDE segment. Our SCDE segment posted first quarter revenues of $169 million. Our Space Technologies and Directed Energy solutions will continue to drive growth in this segment and for the company. As I mentioned earlier, we announced yesterday a $240 million contract award for our long-haul space laser communication system. In addition to anticipated revenue growth from this area, we're confident that our BADGER phased array solution and our Counter-UAS Directed Energy solutions, LOCUST will be key growth drivers for this segment in the future.

Let me conclude my comments with the following. With the acquisition and successful integration of BlueHalo, we have significantly expanded our cutting-edge and battle proven portfolio to include Space Technologies, Counter-UAS, Directed Energy, Electronic Warfare and Cyber Solutions. We have broadened our growth opportunity in a demand fueled market, this has been a deliberate part of our long-term strategy. Our high-volume manufacturing expertise and capacity in these critical areas is also another key differentiator that is unrivaled in the industry.

AV's installed base of more than 42,000 platforms fielded in performing in high demand environments across multiple domains is another aspect of our competitive differentiators. And finally, our track record of exporting and supporting solutions to more than 100 allies around the world sets us further apart than any other player in this industry. We have worked hard to position our company for success and we're very excited to help our nation and allies across the globe. AV stands ready to continue executing and delivering on our promise to our key stakeholders so they can proceed with certainty.

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

Thank you, Wahid. Today, I will be reviewing the highlights of our first quarter performance during which I will occasionally refer to both our press release and earnings presentation available on our website. Just a reminder that we closed our BlueHalo acquisition on May 1. So the results for Q1 and projected FY '26 will include the financial activity from BlueHalo. I'll briefly comment on the results for the quarter and then turn to guidance for the remainder of FY '26.

In summary, we are very pleased with the results of the new AV on all metrics, delivering solid top line and EBITDA growth. As Wahid mentioned, our equity and debt raise in July position us well for growth with over $700 million of cash and investments on the balance sheet. Wahid also mentioned his remarks, we started the year with $454.7 million of revenue in the first quarter, which represents a 140% increase over the prior year as reported or an [ 18% ] increase on pro forma revenue basis. Since the acquisition of BlueHalo, our regional revenue mix has shifted towards the increase in domestic revenue.

For Q1, 78% of our revenue came for domestic customers and 22% from international customers. In the first quarter, Ukraine represented 8% of revenue. The rest of Europe represented another 6% of revenue. The [indiscernible] revenue to remain between the 5% and 8% of total revenue in FY '26. When compared to pro forma revenue for the first quarter of FY '25, several of our products realized tremendous growth. Switchblade 600 product had over 200% revenue growth, [ 1220 ] had over 6x revenue growth, our LOCUST Directed Energy Counter-UAS has also had 5x pro forma revenue growth. Time revenue is nearly double a reflection of the strength of our Counter-UAS business and finally, BADGER, [ advanced RS ] [indiscernible] grew nearly 40%. Notably, we were awarded -- we received an award for [ $70 million ] for an additional BADGER units in the quarter, and as this is part of a larger order we expect to receive in Q2.

As mentioned on prior earnings call, AV is now operating under 2 reporting segments. Autonomous Systems or AxS, and Space, Cyber and Direct Energy or SCDE. AxS ended the quarter was strong with $285 million of revenue, which represented a 22% increase over FY '25 pro forma revenues. Of the total in the quarter, about 35% [indiscernible] Switchblade 600 products, 15% came from Puma products, 9% from Switchblade 300 from Counter-UAS, and 6% from JUMP 20.

SCDE ended the quarter with $169 million of revenue, which represented a 12% increase over pro forma FY '25. Of the total for the quarter, approximately [ 90% ] came from BADGER's Satellite ground station, 12% from LOCUST Directed Energy Counter-UAS Systems and 12% from our Advanced R&D businesses, which focuses on research, development, testing and evaluating emerging technologies to ensure their effectiveness, active transition to the war [indiscernible].

In terms of adjusted EBITDA, Slides 10 to 11 on our earnings presentation shows the reconciliation of GAAP gross margin to adjusted gross margins and net income to adjusted EBITDA. Adjusted EBITDA in Q1 was $56.6 million, up from last year's Q1 of $37.2 million as reported, primarily due to the incremental BlueHalo results. EBITDA as a percentage of revenue ended at 12.4% of revenue, which was in line with our expectations. We continue to forecast full year adjusted EBITDA at 16% of revenue.

Moving to gross margins. In the first quarter, consolidated GAAP gross margin finished at 21% versus 43% in the prior year. The decrease in GAAP gross margins can be attributed to the higher service mix of 31% of revenues versus 16% in the prior year, plus an increase of intangible amortization and other noncash accounting expenses of $33.7 million over FY '25. First year -- first quarter adjusted gross margins were 29% versus [ 40.5% ] in the first quarter FY '25. As noted, the business landscape of the combined new company has changed significantly with a higher service mix and several products at early stage with a maturation. We believe adjusted gross margins to continue to improve throughout the year ending up in the mid-30s by Q4, with an average for the year in the low 30s.

Moving on to operating expenses. Reported GAAP SG&A for the quarter was $131.3 million versus $33.8 million in the prior year. Net of intangible amortization, deal integration costs, adjusted SG&A was $65.2 million versus $32.7 million in the prior year. The increase is largely a result of the combination of BlueHalo. As a percentage of revenue, adjusted SG&A in the quarter was 14.3% of revenue versus 17.3% in FY '25. Again, these SG&A levels represent a shift in the business model, and we expect to end the year in the 11% to 13% range as we begin to realize synergies and achieve higher revenue. R&D expense for the first quarter was $33.1 million or 7.3% of revenue compared to the $24.6 million or 13% of revenue in the prior year. Again, this is a shift in the business model and expect R&D as a percent of revenue to end the year at between 6% and 7% revenue range.

Now turning to GAAP earnings. In the first quarter, the company generated a net loss of $57.4 million versus net income of $21.2 million recorded in the same period last year. The decrease in net income of $88.5 million can be attributed to increased intangible amortization, other noncash purchase accounting expenses of $74.9 million from the BlueHalo acquisition, plus another $23.7 million of deal and integration, $23.7 million of deal and innovation costs.

In addition, interest and other income expense increased [ $14.6 ] million year-over-year. This was offset by an additional $6.3 million of income from operating activities and a decrease in taxes of $16.7 million.

Slide 12 shows the reconciliation of GAAP and adjusted and non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.32 for the first quarter of fiscal 2026 versus $0.89 per diluted share for the first quarter of fiscal 2025.

Moving to the balance sheet. At the close of the first quarter, our total cash investment amounted to $722 million. As most of you know, we completed a $1.7 billion financing during the first quarter, of which approximately $950 million used to pay down the debt from the BlueHalo acquisition. We now have a completely new balance sheet as a result of our BlueHalo transaction. Consequently, many of our balances are not comparable to prior periods. For instance, our overtime revenue recognition has increased from 41% to 75% of revenue year-over-year driving unbilled receivables. With that said, unbilled receivables continue at a higher level than we are targeting. We have been negatively affected by the alignment of the contracting officers for our Switchblade product. This transition has been completed, and we expect unbilled to be down significantly in the next quarter.

Turning to backlog. Our funded backlog at the end of first quarter of fiscal 2026 finished at $1.1 billion. Unfunded backlog grew to $3.1 billion at the end of Q1. I should note that we include in our visibility -- visibility from expected [indiscernible] long-term contracts, which we expect to perform during the fiscal year, which have not been funded as of this date. Given this, the visibility to the midpoint of our revenue guidance range is 82%. We expect our unfunded backlog to continue to grow significantly during the second quarter due to the recently announced contracts and new contracts in the pipeline.

Finally, I would like to provide you with our updated FY '26 guidance. On Page 6 of the presentation, we provide fiscal 2026 guidance. Fiscal year revenue is still expected to be between $1.9 billion and $2 billion, adjusted EBITDA remains between $300 million and $320 million. But non-GAAP adjusted EPS is now projected to be between $3.60 to [ $3.7 ] due to the refinancing of our debt. The midpoint of our revenue guidance range represents nearly 15% growth over the pro forma FY '25. As mentioned previously, our visibility to the midpoint revenue guidance range was at [ 82% ], which is at the higher end of the historical range at this point during the year.

I'd like to close by echoing Wahid's remarks, we are very well aligned with the U.S. DOW priorities and those of the allies and are excited about our prospects.

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

Thanks, Kevin. Before turning the call over for questions, I'd like to reiterate all the positive momentum we have entering our second quarter of fiscal year 2026. First, we achieved another record first quarter with revenues of nearly $455 million. Second, bookings for the first quarter reached nearly $400 million, and our funded backlog grew to $1.1 billion. Unfunded backlog is now at $3.1 billion. Third, we introduced several innovative solutions in Counter-UAS, Space Communications and Directed Energy, among other areas that are directly aligned to our customers' urgent priorities and represent multibillion-dollar market opportunities over the next several years. And fourth, we're maintaining our fiscal year 2026 guidance with revenue between $1.9 billion and $2 billion.

Our strong first quarter results underscore the confidence we have in the future of AV and our ability to reshape the future of defense. Our integrated capabilities across every domain of modern warfare combined with our enhanced innovation and ability to scale, strengthens our ability to address emerging global priorities. We stand ready and committed to deliver just as we've always done. With strong support on both sides of the Ireland Congress, the current administration and our customers, we're confident that AV will not be negatively affected should Congress fail to pass a budget resulting in a continuing resolution. The support for our solutions and the urgency behind the need for our products gives us confidence that we will remain a high priority and either scenario.

Additionally, we have significant momentum internationally with our allies, where our ability to deliver battle-proven solutions quickly at scale is certainly a competitive advantage. 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 pit at a 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 Ken Herbert with RBC.

Good afternoon Wahid, Kevin and Denise, really nice results. Maybe next, Wahid. Yes. Maybe, Wahid, just to start off. Obviously, good revenues. You didn't change the full year outlook. I think you've obviously got better visibility at the 82% than you've had at this point in prior years. Can you just talk about some of the puts and takes as we think about the $1.9 billion versus $2 billion full year revenue outlook and how you're thinking about risk of the guidance on the top line and opportunities to maybe outperform that this year?

Thank you, Ken. Yes, we're very pleased with the results. I'm very pleased also with the integration of BlueHalo with AV. As you know, this is no easy piece. And this is a very large undertaking, combining 2 of the best-of-breed companies creating a $2 billion enterprise that addresses all the key areas of our defense priorities, both domestically and internationally with our allies.

In terms of our guidance, we feel very good about our first quarter results, but it is first quarter. We've got 3 more quarters to go. The budgets for the year are not totally set, there is a potential for a continued resolution, which we don't believe that it's going to affect our fiscal year. But in order for us to perform above and beyond that, it's still a lot more questions left. And so given all those bases -- also some of these contract timing is really critical because the U.S. DoD is going through a lot of changes in transformation in many of their services. And given all that, we believe that we're on track, again, it's going to be a fantastic year with record revenues and profitability, nearly $2 billion in revenues and $300 million worth of adjusted EBITDA, we're going to be the [ poster child ] of what a defense tech company and the prime should look like, and we're pleased that we've achieved the results we have so far, and we look forward to updating you in the future.

Our next question comes from [ Anthony Valentini ] with Goldman Sachs.

Thank you for the question. I'm curious, are you guys seeing increased competition now that there is an emphasis on the unleashing of [ American Drone Dominance ]? And how do you think price will be impacted over time by competition, like you guys on your Switchblades, specifically, I think you guys have talked about low hundreds of thousands of dollars as the price there. If there's more competition over time, is there a risk that, that price is going to go down and margins will suffer?

Anthony, thank you for that question, and great to talk to you again. Obviously, the focus of the U.S. for the [ American Drone Dominance ] is really important, and we support it, and we're very pleased with that. We are used to competition and competitors ever since I've been with this company for over 1.5 decades. It is not new to us. We've had the drone in [indiscernible] when the commercial drone industry was going on. We've had that with our small UAS, there's been doubts about that our performance for decades.

AV has continued decades and decades to be able to deliver and prosper and stay as the leader in the spot market. What that tells me is that actually the focus in this market and the amount of growth that there is, it's actually attracting more and more investments, of course, but also attention to our customers. So it's a good slide that the U.S. AV believes that we've got a scale and we got to grow. But we really feel strong about our portfolio. There are several, several key competitive differentiators that enables us to actually lead and continue to stay as the leader and there are no shortcuts in this business. It's one thing to say that we can -- somebody can do it, actually doing it and delivering it at scale, it's a very, very high bar.

I want to remind everybody that our systems are used by the tens of thousands globally with scale repeatedly multiple times in our history. And we have a unique competitive advantage in terms of having the manufacturing capacity to produce these things at urgent and very short cycles based on the demand that [indiscernible] priority where U.S. [indiscernible] allies, that is a clear, clear advantage for AV amongst many other things, and we look forward to that. So while we always take competitors seriously, we're very confident about the best-in-class solutions that we've got in our track record and the positioning that we have in the marketplace.

I mean, we've always provided a very cost-efficient product and a lot of the competition -- or a lot of that is about the value versus alternatives. So Unmanned Solutions provide incredible value. A lot of the pressure would probably come more in the low end of the market than in our categories, which, as you know, Group 2 and above.

Our next question comes from Louie D DiPalma with William Blair.

You announced the AV_Halo unified software platform last week. Can you talk about how your software integrates with third-party hardware providers in addition to the AV portfolio of systems? And secondly, is there the potential that your software platform can be open to third-party software developers such that others can build applications on top of your software, similar to how like Palantir has their Maven Smart System and it's becoming a platform and you have this command and control system that seems to have a lot of similarities there for command and control for the [indiscernible] UAS and [indiscernible] UAS and your laser systems, et cetera.

Welcome, Louie. Of course, AV_Halo's software we just announced is really a great example of how we brought the best of the both worlds from AV's portfolio of software solutions as well as BlueHalo's software solutions into one cohesive umbrella of an ecosystem and platform that allows us to deliver and innovate in lots and lots of different areas of this entire market.

There's certainly a major, major need and a market opportunity for companies like AV and others to try to help simplify and integrate and inter-operate all these systems together. That's precisely what AV Halo's strategy and product road map and the value proposition is all set to be.

In regards to your first question, yes, we already today enable third-party devices, third-party platforms, hardware systems to actually integrate and be interoperable with AV_Halo, and many, many other subsystems or modules of AV_Halo. AV_Halo is going to be an umbrella brand with lots and lots of different tools and applications underneath it. And we continue to invest in that. So that's definitely a yes for that.

In terms of allowing other third-party companies to develop software as an API and open platform, absolutely true, yes, that's the case as well. In fact, we already have some solutions that we provide to our customers to our small UAS and our low munitions, which uses third-party apps as a software that is plug and play into our system. And so the last thing I want to mention is that we've developed AV_Halo ecosystem from the ground up based on the expertise that we have on the edge of the battlefield with all the platforms and tens of thousands of systems that we make out there in all the different domains. That gives us a unique competitive advantage because it's much, much harder to do the [indiscernible], the commanding control connectivity and operability at the lower level at the edge of the battlefield than it is just represented at the graphical user interface at the high levels.

The high level gets a lot of limelight and a lot of hype, but the real value and the hard work is how you interconnect the subsystems in an open modular architecture approach. And that's precisely how we built a software platform that we've got. We're going to continue to invest in it. The software department of our engineering department is the largest department within our entire innovation groups. And so we intend to continue to invest in the best area and innovate and deliver more capability. And that's why our solutions are always been known as software-defined platforms. And I'm glad you asked that question, Louie.

Thanks really extensive answer Wahid. And I will save the rest of my questions for [indiscernible]. So Thanks, everyone.

Wonderful. We look forward to seeing you there, Louie.

Our next question comes from [ Jan Engelbrech ] with Baird.

Congrats on a very strong set of results. I guess with the BlueHalo now poring for the group and clearly, a big domestic presence. I just wanted to sort of have the sense of the exportability of the BlueHalo product offerings. Just given sort of what Europe is planning to spend and sort of their strength in sort of lack of industrial base to do things themselves, but just look at things like sort of the local system and space capabilities that you now have. If you could just talk more about that. And then just a small addition, but with the Red Dragon now being placed on the blue U.S. period last in August, does that sort of imply that it can be explored immediately? Or is that near term, more of a domestic opportunity?

Sure. So really, the BlueHalo solution set brings tremendous complementary capabilities to AV. And as I mentioned earlier that -- in the space domain, obviously, the large [ $1.5-plus ] billion program record that we won with the space force. It is a incredibly advanced innovation and standard capability in the phase of the rate, and you're going to see some of that and hopefully, if you to come to our open house in Albuquerque later next month.

So we're the leader in that, and that's a very large program. The [ Volcan ] System, which I mentioned is the leading Directed Energy, counter draw or counter-UAS solution in the market today. We delivered our first batch of systems to the U.S. Army. We continue to deliver some more mounted on a moving mobile JLTV, as I mentioned. And it is going to be a very large multibillion-dollar market. We believe that the Counter-UAS Directed Energy Solution, the lasers which is the LOCUST platform, as an example, is a multibillion-dollar long-term opportunity for the company, and we're the leader in that space clearly.

And lastly, I'll mention also the [ Titan RF ] solutions, we're already getting a lot of orders for international customers for that. It's one of the best performing solutions out there in the market, and that market is multibillions of dollars over the next decade as well. So absolutely, we view that the BlueHalo solution studies incredibly complementary to our solution set. They're growing, we're winning a lot of opportunities and programs and we're positioned for a lot more.

And then being the part of the BlueHalo certified product, which you saw are one of our products, absolutely allows us to actually sell internationally easier and also the U.S. DoD and other government agencies can buy easily because of the certification. And so that's another great progress for our company and our teams. And we're very pleased with the products we're making so far.

Great. Very helpful. And just a quick follow-up. In terms of Golden Dome, we're obviously that great program win in [ GEO with Legend Terminals ] where you sort of seem to have no competition, really. And we've seen in lower or with sort of the problems that vendors are experiencing on the optical terminals. Is that -- so I mean, would you still consider that a Golden Dome opportunity given that it's going to have a bit more latency than the satellites in [indiscernible] orbit? And I guess a follow-on, is there any willingness to move down into that orbit just given sort of the delays in vendors have seen in the [ PWSA ] program?

Yes, I'm glad you brought that up because our solution for the laser comps and phase the raise addresses both of those 2 key areas that you mentioned. Absolutely with you that as we start to think about the Golden Dome initiative and objective, the ability to communicate and space by itself. We learned very, very convincingly in Ukraine, we all the world has learned that RF communication is not safe and secure. It is not immune [indiscernible]. The same thing is true of all the satellites that we have in the space, whether it's commercial satellites or military satellite, national security satellites, they are susceptible to the same jamming issues because they talk to systems on the ground and they talk to each other. So the laser communications, which were the -- currently the undeniable industry leader technologically as well as product maturity-wise, is the clinical way of the future of satellites to be able to communicate and talk to them.

And so we offer that capability. And absolutely, we can do that not only for the [indiscernible] synchronize, but for [ MEO and LEO ] satellites as well. In fact, we have a product, a separate product in our [indiscernible] product set called the [ Panter ] that is a smaller system that allows us to offer that to international analyze many other customers for LEO and MEO satellites as well. And so that's why I said that market is a multibillion-dollar market, which we believe is just that it's infancy. And we've got a leading full position and as we continue to execute on our strategy, I think we're going to see a lot of growth in that area and a lot of more attention and focus on the U.S. and a lot of commercial companies as well, and customers as well.

Our next question comes from Jonathan Siegmann with Stifel.

Maybe just on funded backlog. You had disclosed back in November that BlueHalo had about $600 million of funded backlog. So when I add that into what you had on April 30, it seems like maybe it's a little bit lower than what we expected. So can you confirm, number one, do the accounting change when you merge that in, just they got a question that maybe something that dropped out and I was hoping you could confirm that is not the case.

I don't know where the $600 million comes from. But at the beginning of the period -- well, I don't have a BlueHalo, but the current SCDE division had about just over 300 and increased that during the quarter of backlog -- funded backlog.

Yes. Just to add to that, Jonathan, we have won and booked quite a lot of really significant unfunded contracts that allows our customers to add dollars to it. Some of that, Jonathan, is related to the fact that a lot of the funding that has been authorized and approved by Congress as well as by the President, for [indiscernible] as part of the additional funding sources that they're getting, that money hasn't transitioned yet and been released to the services and the program executive offices to authorize or put task orders against it.

So what we have is a great situation where in the -- this quarter and next quarter, Q2 and Q3 we expect to book an enormous amount of funded orders and firm contracts against those large unfunded existing obligations. And so in general, our funded backlog which was roughly about $1.1 billion, the unfunded part is much, much bigger. It's almost 3x bigger. And we're going to see more bookings and task orders to come in this quarter or next quarter to keep building on that momentum that we've got established.

Yes. I mean we think contract signings in the second quarter. I mean we have the evidence of the laser contract we just signed could be well over $1 billion, approaching $2 billion in the second quarter. So we see a lot of momentum already in this quarter, which we have some time left. So we're very optimistic.

Our next question comes from Greg Konrad with Jefferies.

Maybe just kind of following up on that question. I mean in the script, you called out 20 programs, $20 billion over the next 5 years. Can you maybe talk about how much of that is competitive versus follow-on? And when you think out the next maybe 6 months, what are some of the larger decisions within that pipeline that you expect to be made competitively?

Sure. So Greg, as you know, we haven't shared such statistics in the past, and I intentionally wanted to share that to emphasize the fact that we are a different company today. And the opportunities in front of us are massive, literally massive. And the 20-plus programs that were changing and we're pursuing, we're actively engaged in and majority of those cases, if not all, we're one of the top contenders for those programs. we're very, very confident that many of those programs over the next several years is going to convert into some sort of a backlog and demand for our solutions. Number one.

Number two. Look, you can look at our track record. We have a very high win rate. The timing of those contracts and the selection process may change slightly because of the way that the U.S. DoD and the funding and the congressional budgets work. But overall, we have a very high win rate when we engage in opportunities. And so we don't expect it to be 100%, of course, but there's going to be more competition. But the magnitude of programs and the quality and the size of these programs that we're going after is quite remarkably significant. And we're very pleased with that. It encourages me as a as a member of this team is that we worked really hard to get here, and I think we've got a lot of great years ahead of us.

And I think the emphasis has shifted to more off-the-shelf, proven capabilities, companies that can scale as kind of part of the formula. But it also means they may pick other -- more than one vendor for some of these programs because they want to kind of hedge their bets on the scalability place.

And I guess just as a follow-up, I mean that part seems to kind of fit what we're hearing about maybe how Golden Dome is awarded. I mean you called it out a couple of times in the script, but how do you think about award timing or decisions tied to that program, just given the accelerated schedule? And how much of that opportunity is maybe tied to Golden Dome?

Yes. So we're not really counting Golden Dome specifically as part of that 20 programs. Maybe some parts of it, it's very small parts of it, not much. These 20 programs that I'm referring to is well -- these are things that we've been pursuing well before the Golden Dome was even announced. And so Golden Dome obviously adds to that does not subtract from it and that is not inclusive of that, number one.

Number two, we really believe that we have got a very compelling solution that the U.S. deportment of Defense and our national security agencies and the President and the department can actually implement very quickly at almost no R&D cost. These are systems that we've already developed. And a lot of folks are talking about space and missiles in the space and satellites and space. This is about our home lab and how we protect critical sites on our home land territory. And the solutions that we've developed that really addresses the emerging threats against drones and hypersonic missiles and cruise missiles and ICBMs we've got this solution set today, not only the hardware platforms, but also the software solutions that can sense them that can actually identify them and then also to actually [indiscernible] any few different systems within our existing customer footprint to work as an interoperable integrated system.

So we've invested quite a lot of energy in the last several months to architect that solution set, and that's why we made the public announcement with our partner [ SienaBada ] Corporation. And we're looking forward to actually engaging with the government, we are engaged with us today. They're obviously getting spooled up on that, and that we really wish the opportunity that we'll have an opportunity to actually discuss this with them and show them what we can do right away. And we go as far as I'm confident that if they give us a chance we can implement a solution at a site this calendar year, this calendar year. And so we feel good about it.

Our next question comes from Andre Madrid with BTIG.

On LRR, I know you mentioned last quarter that a decision would likely be released within the next 3 to 6 months. Is that kind of -- is that still in the cards right now? Should we expect kind of a decision now imminently?

I do, Andre. I mean we're talking to the program office of the U.S. Army very, very regularly. They're very impressed and happy with our solution set. We believe that our solution meets the U.S. Army's requirements for the LRR program better than any other solution on the market. We also know that they most likely will down select the 2. And as Kevin said earlier, that they would keep at least 2 vendors sort of warm and engage in this development. We have ramped up manufacturing. We're ready to go. We've been getting ready because we know that the U.S. Army has an urgent need. Persistent low-cost ISR at the end of the battlefield and the different theaters is incredibly important, and we've got one of the most affordable low-cost solutions out there. And the P550 delivers on that quite well.

So I'm hoping that the announcements will come sooner. We're still within that time frame that I mentioned 3 to 6 months. we're very close to getting to that 3-month period. It's not actually have been 3 months yet, but we're looking forward to it. And I believe that the Army will make some kind of an announcement quite soon.

Got it. Got it. That's helpful. And I guess, sticking on LRR and P550 you mentioned the international opportunity that's present. I guess just how big is that on a relative basis? And then kind of in that same mindset, you mentioned that you could potentially see the first P550 order as early as this past quarter. So I just wanted to see if there's any update there?

Yes. So we do hope that we receive an order. There's no opportunities in our pipeline, both domestically and internationally beyond the U.S. Army for the P550. As I said that the P550 in my personal opinion, is going to be another product that is going to be similar and consistent to the other product franchises that we already have. The success of the P550 with the U.S. Army as part of the LRR program will translate, most likely will translate into a global franchise product franchise, similar to Puma, Switchblade 300, Switchblade 600, Raven and many other products that we have. And so I already know that we're engaged with multiple countries, many of them would love to procure P550. We're ramping up manufacturing for that reason. And we expect -- we hope to actually update you in the next quarter or so some successful reasons, some wins and some awards.

Awesome. Wahid, I appreciate the color. I'll step away and leave it open to the rest of the queue.

Our next question comes from [ Colin Canfield ] with Cantor Fitzgerald.

Could you maybe just walk us through the cash flow bridge for the rest of the year and essentially kind of how should we think about normalized working capital balances for the business maybe as a magnitude in terms of total dollars or as a percentage of revenue?

Well, as I said, I mean, I think there's opportunity on the balance sheet, particularly in the unbilled receivables area. Our goal is to be cash flow positive to have some cash conversion this year versus last year. And we feel that we're positioned at that now. The only caveat to that is as we look at our plans for growth, we may see a situation where several of our products may need to ramp up here. And as I said earlier, the U.S. DoD is pointing the premium on manufacturers you can scale up. So it's kind of a balancing act between cash generation of that. But we do feel comfortable with the cash flow savings from working capital that we could offset any increases in the CapEx but it should be in line with our guidance. But if it goes up a little above that, it would probably be offset by worth of capital improvement.

Got it. I just your normalized view in terms of kind of ex growth environment? Is there like a kind of proxy for how large the account would be, like a rough kind of sense?

How long the unfunded or [indiscernible]?

How much working capital should go onto the balance sheet? Just how much...

For the year, all set and done, it shouldn't go much higher than it is right now.

Our next question comes from Trevor Walsh with Citizens.

Great. I wanted to just follow up on the $240 million work for the laser terminals. I understand a 3-year delivery period. Can you maybe just give us a rough framework for how that revenue will probably flow over the course of that? And then just kind of what the kind of upside opportunity is something similar to that deal or just timing of that potential upside? Just again, I know just not specifics, but just from a general outlook.

Sure, Trevor. So we consider that award a landmark event for us for multiple reasons. Number one, it's a very large contract. Number two, it's the technology of the future that is going to make a huge impact in our entire space domain as a whole for the country. And we are the best in the world in that category. Our technology is second to none. There's nobody that can actually do it better than us in this area. And I expect this to actually go.

So our customers very more limited to go past. Obviously, the funding is to do a couple of things. One is to finish the development and the first article of the system and also the second one is to actually transition it to initial rate low production and prepare for full rate production, which will happen a year later or [indiscernible] a year later. So that's exactly what we're working on. We're very bullish on that. I think the market for laser communication is huge.

There's 2 reasons for that. Number one, there's lots and lots of satellites in space that is going to require this mechanism of communication. Our res communication, as I said earlier, is basically compromisable and compromised already, satellites need to communicate to the ground into each other. We've got the secret sauce and the technology to do it. We've got the full position in the market. We've got a solution that works and the customer's bot. And as more and more satellites come online, the need for this is going to become more and more evident. And so it's a groundbreaking event for us, and we feel very good about that for the long term. So I think it's going to be a significant growth driver over the next several years beyond just fiscal '26 for us once we just transition from low rate production to full rate production and deployment of the systems [indiscernible] space.

Our next question comes from Austin Moeller with Canaccord Genuity.

So just my first question, just looking through the budget and the congressional drafts of the budget, there's about $68 million in there for launch effects, which is, I guess, what they renamed [ LMAMS ]. And I presume that does not include FMS to Ukraine, correct? That's just purely Army stock filing.

That is also my understanding, Austin, that the $68 million that's in the budget, for launch effect is all -- it's only for the U.S. domestic consumption of the different variants of the launch effects because launch effects comes from small, medium and different sizes and different effects, it's only for the domestic U.S. DoD not for the [indiscernible] customers and demand.

Okay. And could you just go into a little bit of detail on the energy requirements for LOCUST on an [ Ampol or DEM Shore ] ad platform, mobile ground vehicle versus the energy budget that's available for a fixed in placement or on a Navy ship, for example?

Yes. So Austin, that's another area I'm very bothersome because our Directed Energy low-cost laser system trying to solve the problem, the real mission problem of how do you detect and to feed a Group 1 or 2 or 3 drone or a fast-moving missile. And the way you do it, most people are trying to add more energy and pop more energy at the target. But if you're not firing correctly at the target and accurately, it's essentially useless. So that you can make it as big as you like, it isn't going to be affected.

The [indiscernible] solution is that we have the best technology when it comes to actually delivering those photons and the laser at the right points of the target and actually identifying the target, classifying it and then pointing the laser directly where you want to actually defeat the target and make it come up from the polymer in the ground. And so that secret sauce is very, very unique to AV's core competency and expertise, and that's why our solution doesn't require a lot of power. We are roughly about 20 kilowatts, 15 to 20 kilowatts system, and we have plans to go higher. The [indiscernible] systems are much, much more expensive, much bulkier and bigger and less mobile and maneuverable.

Our system can be -- has been installed. As I said on the call in my remarks that we've installed it and we delivered it to the U.S. Army on a JLTV, and we're going to deliver more of them. U.S. Army is very pleased with our system. It's performing really well on various tests and missions. And we believe that this is a market that we're just scratching the surface today. And I believe it's going to be a very large part of the Counter-UAS and Counter-Hypersonic missile and defense system, including the Golden Dome. So it has multiple implications in the market for various missions. And we're actually quite encouraged and [indiscernible] by that.

That's very interesting. Thank you for the detail.

Our next question comes from Austin Bohlig with Needham.

Congrats on the solid results, guys. My question is [indiscernible] you guys [indiscernible]. My question has to deal with the full year guidance. And I think you guys have discussed this in prior questions. But if I'm understanding you right, with all this big funding that was in the [ OBB ], has yet been allocated to specific departments. Is it fair to assume that none of that is baked into your current guidance? So might leave some move to upside if current contracts flow over the next couple of quarters?

So Austin, some of that is baked in, but not all of it. And the reason for that is because it's a very fluid sort of timing in the market. Those funding of the [ OBB ] and as I said, it hit all the accounts within our customers' systems were not to be able to contract that out. Now how long it takes to do that really matters as to how much we can deliver this year, primarily because of how much time we're going to have left in the year to be able to execute against it. There's only so much ahead planning and at risk that we can go given the situation that we're in right now.

So for that reason, I would say, we feel very strong about our current guidance. Some of the [ OBB ] dollars is baked into our guidance and our expectations, but some of it is not. And then every day that goes by, by the budgets not being approved or continuing resolution going forward or the dollars, not hitting their accounts, it could actually add more risk for that not to happen this year, but it will happen in the following year. Regardless we're going to have a great year and we're going to most likely going to finish the year strong with a very strong pipeline in bookings that can set us up for even more success beyond fiscal 2.

Got it. Just a quick follow-up, like within of that funding that you guys are including in your current guidance, like, which technologies or products is that focused on? Is that more on the UAS side, Counter-UAS. Would just love some color there.

Austin, so it is so difficult to just name one particular product or technology that we have relative to the priorities of the defense. I am a very firm believer that the prospects for growth and prosperity for AV has never been better. And we're going to have a fantastic year this year, and we're positioned and poised to grow even more beyond this fiscal year. There is money responding and there's need urgent requirements for drones for low munitions, for Counter-UAS RF, for lasers, for the Golden Dome, for software solutions that we have as our AV_Halo is therefore our Titan family of our gamers there is money for space laser communication and needs for that. And it's also for phase arrays and scar and BADGER Systems that we have.

I think the opportunities are for us, both domestically and internationally, has never been better. And we've worked hard over the last decade to position ourselves for this type of an opportunity that really is remarkably unique in my view. And so we're very pleased with the execution of our team. pleased with our results and how we put investments we've made and the best we've made and the company we've built to position ourselves, and we look forward to updating you in the quarters to come.

Thank you. I would now like to turn the conference back to Denise for any closing remarks.

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

Thank you. This concludes today's conference call. You may now disconnect.

Good day and thank you for standing by. Welcome to AeroVironment's Fourth Quarter and Full Fiscal Year 2025 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 your speaker today, Director of Investor Relations, Denise Pacioni.

Thank you and good afternoon, ladies and gentlemen. Welcome to AeroVironment's Fourth Quarter and Full Fiscal Year 2025 Earnings Call. My name is Denise Pacioni, Director 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 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 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, June 24, 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 fourth quarter and fiscal year 2025 earnings conference call. I will start by summarizing our quarterly and full year performance, followed by Kevin, who will review our financial results in greater detail and provide guidance for fiscal year 2026. I will then provide a summary of our key messages. And finally, Kevin, Denise and I will take your questions.

Please be aware that our fourth quarter and fiscal year 2025 financial results do not include any financial activity from BlueHalo acquisition, except for pre-closing deal and integration-related expenses.

I'm pleased to report that once again we have achieved another record fourth quarter and full year results, exceeding our expectations, while positioning us for even greater long-term profitable growth. We had an incredible year marked by robust demand for our innovative solutions, which enabled us to achieve double-digit organic revenue growth and significant increase in profitability.

Our investments in all business segments helped drive demand for our products, which led to key domestic and international wins and enabled us to launch 3 new groundbreaking products this year, namely the P550, the JUMP 20-X and the Red Dragon.

Now I would like to highlight our key messages for fiscal year 2025, which are included on Slide #3 of our earnings presentation. First, we achieved record fiscal year revenue of $821 million, which is 14% higher than the prior year period; and record fourth quarter revenues of $275 million, which is 40% higher than prior year period.

Second, in fiscal year 2025, we secured $1.2 billion in total bookings, underscoring the robust demand for our innovative and battle-proven solutions. Third, we ended fiscal year '25 with funded backlog of $726 million, which is 82% higher than the prior fiscal year. Fourth, we closed our acquisition of BlueHalo, further strengthening our industry-leading position as the next-generation defense tech prime with an all-domain portfolio of innovative solutions across air, land, sea, space and cyber.

And fifth, we are confident, AV is better positioned than ever as a result of important company milestones we achieved throughout the fiscal year, and we're setting our fiscal year '26 revenue guidance between $1.9 billion to $2 billion.

Let me be clear, in a growing and evolving market, AV's 50-plus years of proven track record of delivering next-generation solutions with a proven ability to manufacture at scale remain key differentiators that sets us apart. We've been working side by side with our customers in the battlefields to help define and deliver solutions, which are shaped by real-world threats they face.

Over the past decade alone, we have invested nearly $2 billion in R&D to develop disruptive software-defined hardware solutions. And we believe we remain extremely well positioned to meet our customers' rising demands by delivering them the best-in-class solutions aligned with their needs.

As an example, this past fiscal year, we introduced 3 significant new products that are directly aligned to our customers' highest priorities. The first is our new Group 2 AI-driven autonomous UAS, the P550, which leverages a modular open-system approach.

Second, we unveiled our JUMP-20X, which is a vertical takeoff and landing, or VTOL, medium uncrewed aircraft system, or MUAS, engineered to revolutionize shipboard UAS operations. With an advanced heavy-fuel engine and fully autonomous takeoff and landing on a moving small battleship, JUMP 20-X enhances operational flexibility, simplifies refueling logistics and ensures mission adaptability across diverse maritime and expeditionary environments.

And finally, we introduced our new one-way attack drone solution, Red Dragon, which is a fully autonomous-capable, GPS-denied one-way attack UAS that directly ties to the needs of our U.S. Department of Defense customers.

As demand for our new and existing solutions continues to rise, we remain confident in our robust manufacturing capacity to scale at affordable cost to meet our customers' urgent needs. We are confident that we're well positioned for strong organic growth in fiscal year 2026 and beyond.

With that, now I would like to provide updates on each of our 3 business segments, starting with Loitering Munition Systems, or LMS. Our LMS segment continues to drive expansive growth for the company. LMS revenues for the fourth quarter rose 87% to $138 million, and for the full fiscal year revenues of $352 million were 83% higher.

Fiscal year '25 reiterated the importance and effectiveness of all our Switchblade family of solutions. This fiscal year, we secured a total of $477 million in funded contract awards. We also secured the single largest award in our 54-year history with a 5-year sole-source Army IDIQ contract for Switchblade products and services valued at nearly $1 billion.

International demand for our Switchblade products also remain strong. There are now 8 countries that have placed firm initial orders and an additional 8 allies actively engaged in the foreign military sales process.

With demand for Switchblade on the rise, we remain active in our manufacturing facility expansion efforts in Utah and expect to have initial production capability by the end of this fiscal year. This new production facility will enable us to support more than $1 billion in annual Switchblade revenues.

Now on to our Uncrewed Systems segment, or UxS. Our UxS segment posted fourth quarter revenues of $113 million, which is higher than the prior year period by nearly 9%. For the full fiscal year, revenues were slightly lower than the same period last year at $382 million.

The Puma AE UAS, a multibillion-dollar product franchise for AV, remains a profitable and sustainable growth driver for the company. As I mentioned earlier, we introduced our new P550 UAS this past fiscal year. Our P550 will continue to lead the entire small UAS industry with many unique features, and we're expanding our manufacturing capacity in anticipation of increased demand.

As we noted last quarter, the Department of Defense announced 2 programs worth over $1 billion in value. We're confident our P550 solution will compete effectively and win key contracts. Our Group 3 medium UAS, JUMP 20, has gained significant traction, particularly in the international marketplace.

Most recently, we secured a $46 million contract with the Italian Ministry of Defense. Maritime efforts on the JUMP 20X are progressing, and we anticipate strong interest and demand for this in the near future.

Additionally, our Uncrewed Ground Vehicle, or UGV business received a contract to deliver 41 UGVs to the German Federal Armed Forces with deliveries scheduled for the summer of 2025 through 2027. This represents one of the largest UGV awards in our company's history. We remain confident in our UxS segment's long-term outlook due to market growth, key contract wins and expanding international opportunities.

Moving now to our MacCready Works segment. MacCready Works continues to develop industry-leading, next-generation solutions and is driving force -- is the driving force behind our latest one-way attack drone, Red Dragon. Revenues for the fourth quarter rose 24% to $24 million. For the full fiscal year, revenues were $87 million, which was 14% higher than the prior year period. As stated earlier, Red Dragon is a fully autonomous-capable, software-defined uncrewed aircraft system that can operate in high-threat, GPS-denied and communication-degraded environments. This cutting-edge solution includes AV's AVACORE autonomous flight software suite and AV's SPOTR-Edge perception system, which we believe are the most advanced technologies in the battlefield today.

Red Dragon provides critical advantages to warfighters. It is designed to be mass produced affordably and can be deployed across land and sea. Red Dragon is now part of our Precision Strike and Counter-UAS group under our Autonomous Systems segment. MacCready Works continues to push the boundaries on leading-edge technologies, and we anticipate many more solutions from this group in the future.

With an excellent fiscal year '25 behind us, we are now setting our sights on further growth as a combined company for fiscal year 2026 and beyond. Having successfully completed the largest acquisition in our company's history, with the addition of BlueHalo, strengthened our position as the premier defense tech leader. We're now better equipped to provide our nation and our allies around the world with new disruptive solutions they need.

Our integrated capabilities across every domain, including air, land, sea, space and cyber as well as our innovation engine, coupled with the ability to scale, positions us to address emerging global priorities and meet rising demand. As an example, recently, the U.S. Department of Defense reiterated the importance our solutions and capabilities play in national defense strategy from precision fires and loitering munitions, autonomous counter-UAS and to space technologies, cybersecurity solutions and advanced munitions.

As we look ahead and to better align with customer missions in our financial reporting structure, starting in fiscal year 2026, we will operate under 2 distinct business segments. The first is autonomous systems, which encompasses uncrewed systems or Group 1 through 3 UAS; precision strike and one-way attack systems, including Switchblade loitering munitions and Red Dragon; defensive systems or counter-UAS solutions that use both radiofrequency sensors and advanced electronic warfare capabilities; ground and maritime robotic solutions; and MacCready Works, the company's innovation engine where autonomy, AI and advanced platform technologies converge to deliver next-generation capabilities.

The second segment is Space, Cyber & Directed Energy, which encompasses space technologies, directed energy solutions, cyber solutions and mission services. By adding space technologies counter-UAS, directed energy, electronic warfare and cyber solutions to our cutting-edge and battle-proven offerings, we have expanded our growth opportunity in a market fueled by strong tailwinds and now offer a comprehensive set of solutions across all domains: air, land, sea, space and cyber.

With more than 50,000 platforms already fielded and performing in high-demand environments, AV now exports systems to more than 100 allies around the world. Since the close of BlueHalo acquisition, we've been working tirelessly on integration and we're very excited to finally be one AV team.

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

Thank you, Wahid. Today, I will be reviewing the highlights of our fourth quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. Just to remind you that we closed our BlueHalo acquisition on May 1, so the results for Q4 and FY '25 do not include any financial activity from BlueHalo, except pre-closing, deal and integration expenses.

We ended a record year with a record quarter in terms of revenue and adjusted EBITDA. This is the third consecutive year we've met or exceeded our initial annual revenue and adjusted EBITDA guidance. This has been challenging in terms of quarterly year-over-year comparisons, but it's gratifying to end the year with a strong fourth quarter and achieve our annual goals.

I'll briefly comment on our results for the quarter and the year and spend a bit more time providing some guidance for FY '26 since the financial landscape of the company will change significantly. As Wahid mentioned in his remarks, we ended the year with a record $275 million of revenue in the fourth quarter, which represented a 40% increase over the prior year. This completed a record year at $821 million in revenue, which represents 14% growth despite the challenges of reduced revenues to Ukraine. Ukraine revenues in FY '25 end up being at 18% of total revenue for the year and 12% of revenue in the quarter. We expect Ukraine revenue to be less than 5% in FY '26. However, it should be noted we continue to receive orders for upgrades to their Puma fleet and for Switchblade.

It's interesting to note that 52% of the company's revenues were from international customers, of which a little over 24% came from non-Ukraine European customers. We continue to demonstrate a strong international franchise for our Puma, Switchblade and JUMP 20 product lines. In fact, we received orders from 8 countries for Switchblade products with nearly $0.25 billion in FY '25; and the JuMP20 received nearly $100 million of orders in the fourth quarter alone, from which over half came from international customers.

As Wahid mentioned, LMS ended the year strong with $138.3 million in revenue in the quarter, of which about 80% came from Switchblade 600 product. UxS had a strong quarter at $112.6 million, which represented 9% year-over-year growth, led by revenues from Puma products represented over 50% of the UxS revenue; and the JUMP 20, almost 20% of the total segment revenue.

In terms of adjusted EBITDA, Slides 13 and 14 of our earnings presentation shows a reconciliation of GAAP gross margins to adjusted gross margins and net income to adjusted EBITDA. Adjusted EBITDA for Q4 was $61.6 million, up from last year's Q4 of $22.2 million, driven by higher revenue, higher gross margins and lower investments in R&D spending, partially offset by higher SG&A expenses. Full year adjusted EBITDA was $146.4 million, which is 17.8% of revenue and a 15% increase in EBITDA over FY '24.

In terms of the fourth quarter, consolidated GAAP gross margins finished at 36%, which is lower than the fourth quarter last year, primarily due to a $4.6 million negative impact due to noncash accelerated intangible amortization expenses related to our UGV business. Fourth quarter adjusted gross margins were 39%, a decrease from the 40% for the same period last year due to a change in sales mix and lower service margin. Adjusted product gross margins were flat, while service gross margins were down 8% primarily due to service mix.

Full year fiscal 2025 gross margins were at 41.2% versus 41.5% in fiscal 2024. While adjusted product gross margins improved year-over-year from 43.3% to 43.8%, the 6% decline in adjusted service gross margins resulted in the slight decline in overall adjusted gross margins.

Moving to operating expenses. Reported GAAP SG&A for the quarter was $43.3 million, but this includes $5.6 million for deal and integration costs, $2.1 million for a legal accrual and $0.8 million of intangible amortization. Net of these items, SG&A for the quarter was $34.8 million compared to $32.7 million for the prior year in the same period, a 6% increase.

For fiscal 2025, SG&A net of these same types of adjustments was $133 million versus $107.3 million in FY '24 or 16% of revenue in FY '25 and 15% of revenue in FY '24. The increased SG&A largely was driven by increased global sales footprint, and more importantly, increased bid and proposal activity.

R&D expense for the fourth quarter was $25 million or 9% of revenue compared to $35 million or 18% of revenue in the prior year. The large year-over-year reduction in R&D was a result of the HAPS flight testing, which occurred in Q4 of FY '24. Total R&D spend for 2025 ended at 12% of total revenue and within the 12% to 13% range of our initial guidance.

Now turning to GAAP earnings. In the fourth quarter, the company generated net income of $16.7 million versus net income of $6 million recorded in the same period last year. The increase in net income of $10.6 million can be attributed to a $36.3 million increase income from ongoing and business activities offset by nonrecurring expense from an $18.4 million goodwill impairment in the UGV business, a $5.2 million increase in deal and integration expenses and a $2.1 million legal accrual.

For the full year, the company generated net income of $43.6 million versus net income of $59.7 million in FY '24. The decrease in net income of $16 million can be attributed to additional income from normal business activities at $21.7 million, more than offset by the $18.4 million goodwill impairment, $17.2 million increase in deal integration costs and a $2.1 million legal accrual.

Slide 12 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $1.61 for the fourth quarter of fiscal 2025 versus $0.43 diluted share for the fourth quarter of fiscal 2024.

Moving to the balance sheet. At the close of fourth quarter, our total cash and investments amounted to $72.5 million, in line with the same amount at the end of the third quarter of fiscal 2025. Unbilled receivables increased $60 million during the fourth quarter. The increase is largely attributed to the LMS business as the volume in process Switchblade has reached record levels. Contract definitizations except testing schedules and new payment terms have unfavorably impacted the near-term working capital. We expect favorable improvements to these working capital balances in early FY '26.

I should note that after the quarter ended as part of the BlueHalo transaction, at closing, we paid off the acquired company's debt and transaction expenses, which totaled $925 million, utilizing our $700 million loan facility and part of our $350 million revolving credit facility.

Turning now to backlog. Our funded backlog at the end of the fourth quarter of fiscal 2025 finished at a record $726.6 million, thanks to a record $1.2 billion in bookings in fiscal 2025.

Finally, I'd like to discuss the reporting structure going forward and provide you our FY '26 guidance. As Wahid mentioned earlier, AV will now operate under 2 reporting segments. These descriptions as well as the pro forma FY '25 information for each segment can be found on Slide 10 of the presentation.

Total pro forma revenue for 2025 was approximately $1.7 billion for the combined businesses. Our first segment, Autonomous Systems, or AxS, will be led by Trace Stevenson, who formerly led AV's Uncrewed Systems segment. The AxS segment is basically the legacy AV business, adding in counter-UAS RF, maritime robotics and electronic warfare businesses from legacy BlueHalo. The total pro forma FY '25 revenue for AxS segment is just over $1 billion.

Our second segment is Space, Cyber & Directed Energy, or SCDE, and is led by Trip Ferguson, who formerly was the Chief Operating Officer for BlueHalo. The pro forma FY '25 revenue for the SCDE segment is $646 million.

Starting in the first quarter of fiscal 2026, our earnings results will include aggregated revenue performance for each of the revenue categories listed on Slide 10 under the 2 product segments.

Now into fiscal 2026 guidance. On Page 8 of the presentation, we provide fiscal 2026 guidance inclusive of the recent acquisition of BlueHalo, which closed May 1, 2025. Given the shift in our financial model, we are giving more color on the guidance for the year.

Fiscal year revenue is expected to be between $1.9 billion and $2 billion, adjusted EBITDA between $300 million and $320 million, and non-GAAP adjusted EPS between $2.80 and $3. The midpoint of our revenue guidance range represents nearly 15% growth over the pro forma FY '25 results. Our visibility to the midpoint of the revenue guidance is at 70%, which is higher -- at the higher end of our historical range at this point during the year.

We expect adjusted gross margins to remain at 29% to 31%. Adjusted gross margins for the first half of fiscal -- of the fiscal year should be in the high 20% range, moving toward the low 30% as -- throughout the year. R&D expenses is expected to remain at 6% to 7% of revenue. And BlueHalo deal integration expenses should be in the range of $40 million to $45 million, of which approximately $20 million is related to deal closing costs.

The revenue for the year should break down to roughly 45% for the first half of the year and 55% for the second half. Overall adjusted EBITDA percentage of revenue for the year is approximately 16% at the midpoint of the guidance range. This should trend by quarter from 10% to 12% in Q1, trending up to the high teens in the third and fourth quarters as we start to realize synergies, a higher proportion of product sales and increased revenue levels.

Slide 10 further breaks down the expected fiscal 2026 revenue by business segment. Autonomous Systems fiscal year revenue is expected to be between $1.2 billion and $1.4 billion, representing over 20% growth versus pro forma FY '25. And Space, Cyber & Directed Energy fiscal year 2026 revenue expected to be between $700 million and $900 million, representing double-digit growth versus pro forma FY '25.

I'd like to close by echoing Wahid remarks. We are very well aligned with the U.S. DoD priorities and those of its allies and are excited about our prospects.

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 incredible positive momentum we've achieved while entering fiscal year 2026. First, we achieved record fiscal year '25 revenues of $821 million, which is 14% higher than the prior year period; and record fourth quarter revenues of $275 million, which is 40% higher than the prior year period. Second, in fiscal year '25, we secured $1.2 billion in total bookings, underscoring the robust demand for our innovative and battle-proven solutions. Third, we ended fiscal year '25 with funded backlog of $726 million, which is 82% higher than the prior fiscal year.

Fourth, we closed our acquisition of BlueHalo, further strengthening our industry-leading position as the next-gen defense tech prime with an all-domain portfolio of innovative solutions across air, land, sea, space and cyber, well aligned to our customers' highest priorities. And fifth, we are confident AV is better positioned than ever as a result of important company milestones we achieved throughout the fiscal year, and we're setting our fiscal year '26 revenue guidance between $1.9 billion and $2 billion.

Our decades' worth of investing in autonomous systems has paved the way for our industry, and we will continue to lead with best-in-class solutions that are aligned to our customers' needs. We are encouraged by the current administration's ambition for deploying defensive assets our warfighters desperately need, and we stand ready to deliver as we have always done. We're honored to support the most critical defense missions of our nation at this pivotal moment.

I want to thank our employees, shareholders and customers for their continued commitment to AV and our mission. We would not be in the position we are today without them. Together with BlueHalo, we're poised to seize these incredible opportunities to realize the benefits from adding their capabilities across space technologies, counter-UAS, directed energy, electronic warfare and cyber solutions to AV's existing robust portfolio.

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

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

Wahid, Kevin and Denise, congrats on closing the major acquisition.

Thank you, Louie.

Thank you, Louie.

For Wahid, the fourth quarter demonstrated pretty robust Switchblade growth. Can you discuss your view of the Army's announcement of their transformation initiative that came out last month and the report that the Army wants to outfit combat divisions with more than 1,000 drones? And can you discuss that in the context of how the Army has already ordered thousands of Switchblades from AeroVironment and thousands of Pumas in the past? And so do you view this Army transformation initiative as incremental to what you've already provided for them?

Thank you, Louie. Yes, first of all, we are very, very pleased with the results that we delivered in the fourth quarter, setting another record for the quarter as well as for the year, not only in our overall business, but as you mentioned, in loitering munition. I mean that business is growing rapidly. And on fourth quarter, we grew over 83%, as you saw.

And another key figure that's really important is that throughout fiscal year 2025, not only do we book a record $1.2 billion worth of new orders -- funded bookings, but the LMS business or segment alone booked close to $477 million in contract awards. And it's a variety of mix of customers, some for the U.S. Army; some part of the Replicator initiative of the U.S. Pentagon; international customers, about 8 of them so far. And all of that means that we have tremendous momentum with our LMS business going forward. We expect that business to continue to grow.

Specific to your question related to the U.S. Army's robotics or transformation, General George has made a very clear statement and so has the Secretary of the Army that they would like to shift and modernize the U.S. Army and there is significant potential upside. And the key areas that they would like to modernize and transform the U.S. Army, one of them is related to loitering munitions, drones, counter-UAS and counter-drones, directed energy and RF-jamming capabilities, such as our Titan solution set from BlueHalo.

So if you look at the priorities of the U.S. DoD and its U.S. Army, AV is positioned incredibly well. Not only do we represent more than 2/3 or 3/4 of the U.S. DoD's priorities and the Army's priorities, we also are very unique because we have the capabilities that we can deliver today. We've got -- we have the production capacity to deliver -- to make them and produce them at scale, which we've done in the past, and our systems are battle-tested and proven.

So my -- so the short answer is yes, we expect additional incremental opportunities. Details of that is not well known yet, but I think the momentum is very much on our back. And I think the loitering munition business is going to continue to grow.

That also includes counter-UAS in the Army transformation, too.

That's right.

Great. That makes sense. And another question. You guys discussed the very strong foreign military sales pipeline and how I think you are shipping the Switchblade to 8 countries and you are involved in negotiations with another 8. And so I'm just wondering, was there a write-down in the unfunded backlog? And was that write-down related to foreign military sales and the different policies under the new administration?

No. Louie, the answer is no. We did not have any write-downs related to our LMS business or FMS sales on our financials this quarter at all. The LMS business is doing great. We have a lot of momentum behind it. We continue to work with more and more countries and allies who want to get Switchblades into the hands of their warfighters. And I believe the opportunity is just beginning and that trend is going to continue over several years in the future. We're positioned very, very well. But no write-downs related to LMS business in the fourth quarter.

Well, the unfunded backlog converts to funded backlog during the period.

That's right.

Okay. Yes. Investors were just wondering, on a sequential basis, the total backlog adding funded and unfunded went down significantly. And so was there any write-downs in terms of -- or was just everything just unfunded converted to funded and then there was the revenue burn associated with the backlog?

No. I mean, like I said, it really just with a conversion of the unfunded to funded orders during the period and revenue.

And if you know -- Louie, if you recall, earlier this last fiscal year, we had a nearly $1 billion sole-source IDIQ for the U.S. Army that I mentioned in my remarks. And when -- as the U.S. Army places orders firm-funded orders against that, it converts from unfunded to funded backlog. So that dynamic has been occurring for the last few years. And we explained specifically that, that multiyear IDIQ award from the U.S. Army for nearly $1 billion is specifically intended to achieve that because they would like to make sure that we easily can put things on contract and convert them into funded backlog. And we're going to continue to see more orders in the future for our loitering munitions in fiscal year 2026.

Okay. Great. And one last one, if I may. Has -- is there still a significant market opportunity for the P550? And you -- can you just discuss the broad market opportunity for both the P550 and the Red Dragon, which I don't think have generated any revenue for you yet, but they seem to have significant potential for fiscal '26?

Yes. So first about P550, as I mentioned in the remarks, we introduced 3 groundbreaking products, 2 of which you just mentioned, and the third one is the JUMP 20-X Group 3 UAS. On P550, we expect that product to do extremely well. We're positioned really well. The U.S. Army has announced multiple programs, at least 2, one of which were expected to be down-selected and received an order for essentially in the next 2 quarters. And that's our LRR program of record potentially, which is worth about $1 billion by itself.

Besides that, the international demand for P550 has been tremendous so far. There's a lot of interest in it. And we expect to book our first initial order, most likely from an international customer, this first quarter or the next quarter after that. So we expect the P550 to do very well. It is a very large market there. There's a growing demand.

And let me just remind everyone again that the P550 is an incredibly capable solution. It is incredibly disruptive, the economics of it. The multi-payload and multi-mission aspect of its features uniquely positions it to be a very competitive offering. So we feel very good about the P550.

In regards to the Red Dragon, we actually do have some revenue. It's part of our MacCready Works so far. But in the future, it will be reflected as part of our segment 1 that I described under the precision munitions and fires. So we do have initial revenue, but that product is expected to do really well long term. It's just at the early stages. It is a capability that is highly differentiated. And it's -- there is a lot of interest in that capability and not only domestically but also internationally.

So we feel actually really strongly very well, as I mentioned in my remarks, in all of our 3 new products that we launched. We believe that in the next 2 to 3 years, these products will generate hundreds and hundreds of millions of dollars, if not $1 billion-dollar-plus worth of backlog for our company to execute against going forward.

Our next question comes from Greg Konrad with Jefferies.

Maybe just to start with a clarification on the revenue guidance. If I look at the bottom end of autonomous and space, it adds to the $1.9 billion. But if you look at the upper end, autonomous at $1.4 billion, space cyber at $0.8 billion, it adds to $2.2 billion. Is that conservative? Is there any type of intercompany elimination? Just kind of what drives that lower ends lower than the 2 segments?

I mean these are obviously ranges of potential outcomes. I mean we don't operate with large programs of record. So if things go the right way, they'll be at the higher end of the ranges. And if -- just in business, in general, some areas go better than others and others overperform and underperform. So there's, obviously, opportunity to hit them both at the higher end of the range. But in terms of the total, we've taken some judgment on the totals.

And then it's been a little bit less than 2 months of ownership with BlueHalo. I mean, I think that the guidance excludes some of the potential expenses and amortization. Did you include anything in the way of either revenue synergies or cost synergies in terms of the '26 outlook?

We -- as we've put in the S-4, we had some cost synergies projected. We'll be able to achieve those. But obviously, you don't get the full benefit of those until -- for the full year. And as I said in my remarks, we'll begin to realize that throughout the year and kind of hit our original $10-plus million target for the first year.

We -- in some ways, we have some revenue synergies, but it's going to take some time for those to fully play out before we can put those into our forecast and guidance and things like that. So we're still early days here, but there's lots of opportunity, lots of excitement about the things we can do together but haven't had a chance really to start monetizing that in our forecast.

And then maybe just last one for me. In terms of the 70% visibility coming into the year, I think you mentioned that's above where you typically guide. Can you maybe talk to the drivers of that? Does BlueHalo have higher visibility? Did you take a more conservative route in terms of guidance? What kind of drives that higher visibility into '26 at 70%?

Well, the visibility is similar between the 2 segments. There is -- when you look at the Space, Cyber & Directed Energy segment, particularly on the cyber side, they operate off of longer-term contracts with task orders. So there's somewhat more visibility on those. It's not reselling every quarter for them. So they have ongoing relationships there that we forecast in our revenue. But other than that, it's pretty much the same or very similar in terms of percentage of visibility.

Our next question comes from Peter Arment with Baird.

Wahid, on the -- just kind of focusing on the guidance, I guess, in the individual segments. When you look at Autonomous, the year-over-year kind of growth range is quite wide from the -- kind of the pro forma number that you provided, the 14% on the lower end and 33% at the higher end. Wahid, is it just assumptions around what potential LMS volumes can be in Switchblade or maybe first orders for P550? What are some of the kind of key drivers that affect the lower end of the range and the higher end of the range?

Really, Peter, it has to do primarily with the U.S. DoD contracting and timing of these contracts and awards, that drives a lot of that range -- the spread of the range. So we are ready. We have the capacity as a company. We've been -- one of the key differentiators that we have is our ability to turn around and convert backlog of orders into revenue. That is one of our key competitive differentiators and also have the ability to scale quickly and produce at mass and volumes.

However, what we can't really predict effectively, which is really difficult in the entire industry, is how does the U.S. DoD funding and budgets, the congressional approvals and all of that works out, it plays out and eventually makes it into a contract to us. So those are the primary reasons for the range of outcomes and the spread of that range within essentially both segments but more acutely into our Autonomous Systems segment.

Overall, we feel very strong because if the timing of congressional approval of budgets and the signing of the President's budgets and the DoD converting it into contracts happens in a timely manner, we could have a significantly strong year. But it is too early to predict that, and we're just getting started. What we really want to work on is long-term consistent double-digit profitable growth, which is a great position to be for us given the backlog and the opportunity that we've developed.

Yes. That's helpful color. And then just on -- you mentioned the budgets. Just have you had a chance to evaluate kind of some of the key BlueHalo portfolio programs, how they've stood up under the budgets? I know the directed energy solutions and SCAR program certainly have gotten a lot of attention recently.

Absolutely. So we've purpose-built our company from the ground up to be ready for this moment, I call it. This is our moment. We have an incredible opportunity in front of us. We represent more than 2/3 of the Secretary of Defense's priorities. If you look at any documents from Congress, from the National Defense strategy, from the administration or from the Pentagon, you will see from almost pretty -- almost all the services and the COCOMs, you will see that the categories that we play in and we lead and we have the ability to deliver and scale are categories that is important to national security. And what are those? Drones, counter-drones, direct energy, laser communications, space communications, electronic warfare. All of these are things that -- and one-way attack. These are the categories that we, in many cases, invented or we're the leader in. And so we're positioned very, very well on those categories. And I think that we have many years of very strong potential performance and value-creation opportunity here in front of us.

Our next question comes from Ken Herbert with RBC Capital Markets.

This is Steve Strackhouse on for Ken Herbert. Congrats on the closing of BlueHalo, but I was hoping you guys could dive a little further into the FY '26 outlook. How much of the revenue is stemming from the organic legacy AVAV versus BlueHalo? If you can give some color there.

Well, I think we tried to provide the pro formas in the guidance. So you can see on that, I think it's Slide 10. We show the pie chart with the different revenue levels for the different product groupings. Those are the pro forma FY '25 revenues for each of those groupings. So anything -- all the growth that we're forecasting is off of those pro forma revenues. And so you're looking at over 20% growth to the midpoint of the Autonomous Systems Group and over double digit for the Space, Cyber & Directed Energy group.

Okay. That's helpful. And then maybe just as a follow-up. Can you maybe discuss the profitability across the 2 segments? You guys have previously used to give like either an adjusted operating income or gross profit across the 2. Should they be about the same? Or is there a different way to kind of think about each of them?

Well, I think we're not really giving guidance on the breakout of the, say, adjusted EBITDA. That will be reported on a quarterly basis for each of the segments. But I would say, as I said in my remarks, the AxS segment is very similar to the to the existing AV business in terms of its profitability profile. So that's one-half I'm giving you.

Fair enough. And then maybe if I could just ask one more just in terms of the free cash outlook for the year. I don't think I saw that as part of the guide. Should we assume that it's maybe somewhat similar to FY '25? I can appreciate that there's a lot of moving pieces here.

Well, we definitely have some opportunities on the working capital front, as I outlined in the script. And we're very hopeful that we actually generate some cash on working capital this year. We do have a fair amount of capital expenditures expected for the year, but we're looking for a positive cash conversion this year versus last year.

And that's all because of the fact that we're growing and we're making sure that we invest in the areas that allows us to continue to grow and capitalize on these very large opportunities in the future. We are deliberately investing. And as you could see from our track record, the areas that we invested, whether it's R&D or capital, have actually panned out and delivered incredible good value and created value for our company. So I think we want to continue to do that because we're in a very, very good position to capitalize on these opportunities.

Our next question comes from Andre Madrid with BTIG.

We're seeing now it's looking like NATO might move to 5% GDP spending pledge given how much of a sizable portion of sales international is becoming specifically amongst NATO customers. I mean, what's your initial assessment on what the impact of this 5% pledge could be if it does get moved through?

Andre, that's an excellent point and question. We believe that, as we mentioned in my remarks and in Kevin's remarks, we already do quite a lot of business internationally. And we continue to see more and more demand for our systems primarily in Europe, but beyond Europe, even in Asia Pacific as well. The world, unfortunately, is not a safer place than we all wish. There's lots of challenges. There's lots of conflicts. The recent wars and attacks you've seen has basically put an exclamation mark on what you can do with the type of capabilities that we're the leader in. And all of that equates into a very, very large seismic shift in demand and opportunity for us internationally. It's going to take some time. We're going to continue to invest in being more present in Europe. As you know, we already have a subsidiary in Germany. We have a legal entity as well in other parts of Europe, but we want to continue to expand there to capitalize on this.

The reason why we feel more even bullish on this is because we're uniquely positioned to be able to deliver. Most of these countries want to spend these dollars quickly because they lack these capabilities today in mass and volume. Our systems are battle-proven and tested. They work. They have seen its effectiveness, and they trust our company and delivering these systems for decades. And so I think we're incredibly positioned well to be able to capitalize on this opportunity because we can deliver at scale and we are trusted in our solutions do work. So I think that's going to be a trend you're going to continue to see on essentially all of our products, not just on our loitering munitions, but our nonlethal drones, on our counter-UAS solution set, on our direct energy solutions, even our space communication technologies has incredible opportunities ahead of it in the space domain globally and internationally, especially with the European countries.

Got it. Got it. Super helpful. Moving, I guess, to Red Dragon, Wahid. I know we've spoken on this one. But could you maybe just break down a little bit more about what that TAM looks like? I know with Switchblade, you guys have approval to sell to 50 allied nations. But I remember a conversation, it seems like those same restrictions are not imposed on Red Dragon given the ITAR regulations at play. I mean maybe just provide some more detail if possible.

Sure. So as you all know, we introduced Red Dragon just a few -- a couple of months ago. We do believe that it's a category that we're the lead player that is growing incredibly fast. As part of these one-way attack drones and autonomous -- and autonomy-capable solution set and a degraded GPS environment or degraded communication environment is going to be very key.

We believe the market for that is well over $1 billion. The data is quite difficult to get, but we can -- I can tell you that this market, the one-way attack drone category, should be equal, if not bigger than even loitering munitions as a whole. So we believe that this product is going to continue to expand.

And you're correct, the foundational level of the Red Dragon solution set is a commercially developed product on our own IRAD that we do not have ITAR restrictions. Obviously, if we were to put specific payloads or communication devices, then it would become subject to that. But internationally, we can export the base unit quite easily. And it is designed to be modulars, where the payload and the warhead could be actually even integrated outside U.S. with a domestic supplier internationally. And I -- we feel very good about it. It's going to take some time, but we believe that, that product is going to be a significant driver of growth for us in the long run.

Our next question comes from Pete Skibitski with Alembic Global.

I guess just to go down the CapEx route on the 6% to 8% guidance on the cloud build-out. Is that a one-term -- not one-term, 1-year type of a thing? Should we expect CapEx to go back to the kind of that 2% to 3% range in the future after this cloud build-out?

That's just -- that note meant too that it includes cloud capitalization. It's not all cloud build-out. It's really the normal range of facilities, equipment for manufacturing, and to a certain extent, software systems and things like that. So that includes all of that. We expect it to probably trend down over time. But at the same time, we have tremendous opportunities in front of us. So I'm not going to make any predictions at this point in time.

Yes. So Pete, just to echo what Kevin said, we have several, several very serious, large growth potential opportunities in front of us. Let me just name a couple of them. The space communications, the space force is really, really behind and upgrading the entire satellite command and control and communication network that the U.S. relies on. We have won that program of record. It's worth about a $1.7 billion program funded through the congressional budget documents. We can scale that and expedite deliveries in the fiscal year '26 and beyond. That's one. Loitering munition is another one. We're building another factory to increase capacity up to $1 billion in production. Red Dragon is another category that we believe that we're going to have significant upside coming in the next few years.

And then just to name a few other ones, in the directed energy space, counter-UAS, we are the leading player globally. And we know that we have significant needs in our country and around the world, protecting critical infrastructure, refineries, airports, nuclear power plants or military bases, embassies, you name it. There is an enormous opportunity for us, and we have the leading solution that is deployed and it's effective in the field.

So these are just some examples of areas that we see tremendous upside and potential opportunity for ourselves. And so we have made the decision that we want to increase because we see that this will play a significant role in delivering more value to our shareholders and our company in the long run.

Okay. Fair enough. I appreciate it. Just one last one for me, just going back to Louie's question on the backlog, right? So you generated $275 million in revenue this quarter, right? Total backlog declined by a little under $700 million. So the math just indicates there's a little over $400 million that is kind of unaccounted for. It seems like it just kind of fell out of backlog. I think that's what people are trying to kind of figure out there. And can you give us any sense of what was going on?

That's the year-over-year number.

What's that?

No programs are canceled. Nothing was canceled.

How do we...

So Pete, I think what you're looking -- I'm not sure exactly what number you're looking at, but our backlog is significantly higher at the end of this fiscal year relative to fiscal year '24, number one, a significant increase because we booked over $1.2 billion throughout the year and we recognized $821 million in revenue. So that increase helped as well.

The unfunded backlog, which is that IDIQ that I mentioned, has converted to funded backlog, you might be looking at the number there. But we will be glad to explain the details more. Our funded backlog from Q3 to Q4 slightly decreased, slightly, not much, because we also booked a lot of orders in Q4, which essentially, again, backfilled the revenue that we shipped in the quarter.

Yes. Fair enough. We can take it offline.

[Operator Instructions] Our next question comes from Jonathan Siegmann with Stifel.

On booking trends at BlueHalo, we haven't had an update on that since you announced the transaction now over 6 months ago. Maybe can you help us comment on whether things there are going better or less than what you expected? And you mentioned Space, Cyber, & Directed Energy will lag Autonomous Systems sales growth. Can they keep up on bookings this year?

Jonathan, so we actually feel pretty strong and solid about our expectations for the previous -- or the former BlueHalo business and their ability to book orders. We have very similar trends within the BlueHalo former businesses, traditional businesses compared to AV. The only difference I would say is that some of their business related to the cyber and intel are long contracts where a lot of the business is actually selling very highly differentiated engineering sort of content to customers. The growth in that business really has to do with how we scale employees and engineers and people. So it doesn't have these significant higher growth like the rest of our products business. That's one unique difference.

On the other hand, they also are looking at very large, large strategic wins and program and bookings that could be very large, large step-function growth opportunities. And so for example, in the space communication and space operations, we have a huge potential there. Laser comms is another one. Directed energy is another one. Electronic warfare as well as counter-UAS, our Titan solution set is another one. And the trends in the market is such that these are very specific areas that the U.S. DoD needs a lot of help. And so the short answer is yes, we expect the BlueHalo business to actually grow, and there's opportunities for significant booking increases going beyond fiscal '25 there as well.

But back to Pete's question on the CapEx. I really love the enthusiasm you have for lots of opportunities to increase and invest in these really exciting areas. Are those in the future? Or are you already accelerating CapEx plans this year? Because it does seem like your guided CapEx is higher than what you had in S-4 for the combined business?

That is correct, Jonathan. We have already initiated some increases in CapEx in fourth quarter. Most of that is going to show up in our financials in fiscal year '26. That's why the percentages are higher in '26. And it's related to both of our businesses and lots of different products. As I mentioned, the areas are space communication, directed energy, counter-UAS, loitering munition, one-way attack. Those are the key areas. And also unmanned systems is another area that we're investing to scale primarily because we see opportunities coming our way.

Let's keep in mind that one of the reasons why we've been able to actually capitalize on growth and these opportunities is that our ability to be able to deliver quickly and have the production capacity. We're uniquely qualified in this area than other competitors who are either in the prototype stage or very early even trying to build a facility to make their initial -- low rate initial production. We're not in that category. We have battle-proven systems with capacity today that needs to scale even further. So those are the areas, Jonathan, that we expect that to continue to grow. Obviously, we don't expect that to stay forever, but we're only providing you figures for the fiscal '26 and we will provide more color as we go forward beyond fiscal '26.

I do have some clarification on unfunded backlog. During the year, they moved the purchasing of the Switchblade from one purchasing group to another to PEO Soldier is where now all of Switchblade orders are coming through. So the JUONS contract was with the prior purchasing group, and that expired actually on the last day of the year. And they did not renew that one because now everything is going to be going through the PEO Soldier group from here on out. So they'll be likely increasing that IDIQ.

I would now like to turn the call back over to Denise for any closing remarks.

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

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.